ISFIRE | Volume 4 | Issue 1 | Feb 2014

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The Global Islamic Finance Report 2014 (GIFR 2014) is a comprehensive annual review of the activity, trends, new developments and thinking in the Islamic finance industry. It commissions contributions from leading global practitioners and thinkers in the field combining technical experience and invaluable knowledge and insight to propel Islamic finance forward in the post recessionary global financial markets. The core theme of this year’s report is “Human Resources Development in Islamic Finance” with chapters on Islamic financial literacy as a tool for promoting Islamic Finance, ethics and human resource development, challenges, need for talent ecosystem to support sustainable growth, and many others. In addition, the report will also include developments in different industry segments and asset classes, expert analysis on the state of Islamic banking and finance globally. Along with the customary sections, “Review of Industry Segments” and “Country Sketches”, the GIFR 2014 will endeavour to educate and incentivise those with a stake in the industry to continue pushing the boundaries of knowledge and innovation.

M

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alam Istin a I j ar

GLOBAL ISLAMIC FINANCE REPORT 2014

ka Dimi ah Ija n r i s wwama Sala h a-M m i n g

2014

P a r alle l S ala

Global Islamic Finance Report

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ek Sukuk Takaful e l m Retta i B a l m Tak s I i a c ia k F a h i r nan afu a ta h n c n a a t a B k l a ful J u ce l u’a us -Takafu

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WHAT GIFR 2014 WILL BRING TO THE INDUSTRY hh Reportage and analysis of the global practices of the Islamic financial services industry in over 10 sectors hh An exposition of Islamic microfinance hh Discussion on ethics and corporate social responsibility in Islamic finance hh Inspire the discourse on the integration of commercial objectives and social responsibility hh Building effective leadership in Islamic banking and finance hh Analysis of the challenges facing the human resource development hh Assessment of Islamic financial literacy as a tool for economic reform

Edbiz Consulting

Islamic Finance Review Volume 4 | Issue 1 | November 2014 ISSN 2049-1905

Editor-in-Chief

Professor Humayon Dar PhD, Cambridge University

Editor

Rizwan Rahman

International Editorial Board Dr. Mehmet Asutay Durham University

Dr. Asyraf Wajdi Dusuki Yayasan Dakwah Islamiah Malaysia

Dr. Mian Farooq Haq State Bank of Pakistan

Moinuddin Malim Mashreq Al Islami

Professor Kabir Hassan University of New Orleans

Datuk Noripah Kamso CIMB Islamic

Dr. Asmadi Mohamed Naim Universiti Utara Malaysia

Professor Muhamad Rahimi Osman Universiti Teknologi MARA

Dr. Usamah Ahmed Uthman King Fahd University of Petroleum & Minerals

Designed By

Cont ent s From the Editor ......................................................................... 05 Sukuk and the Real Economy: Exploring the forgotten link ........................................................ 06 ISFIRE Insight

Ramlie Kamsari, Chief Executive Officer CIMB-Principal Islamic Asset Management ................................. 26 Interview

The Giant Awakens - NASDAQ OMX ............................................ 34

Anas Rafiq

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Irfan Siddiqui President & CEO, Meezan Bank Ltd, Pakistan .............................. 40 Interview

Global Islamic Finance Awards 2013 .......................................... 46 An ISFIRE Report

Pause for Thought ..................................................................... 54 Professor Humayon Dar

Personality ............................................................................... 56 Sohail Jaffer

Islamic Finance Access Programme (IFAP) Pakistan ..................... 60 An ISFIRE Report

Arabesque — A Unique Story of Values-Based Asset Management .................................. 64

W: www.edbizconsulting.com Printed By Manor Creative, UK

The Collaborative Economy ........................................................ 68

From the Editor Christmas is a time for good cheer and a celebration of the year’s adventures and travails. The 1st of January is a time for change ergo New Year Resolutions. Very few people manage to stick to their resolutions, typically seeking to change some negative trait, or fulfilling some aim (Common resolutions: I am going to quit smoking, or I will run the London Marathon). There is a poetic sense of fancy permeating through resolutions. The soaring feeling of hope tugs at each and every ambitious drive only to wither away by about January 5th!

market superiority, the next moment can be catastrophic. It may be sudden or it may be gradual. Being successful in competition is about sturdiness and adaptability. They work hand in hand.

It is not easy to change one’s habits even though one knows those habits are egregious.

People think overcoming bad traits is a simple case of stopping. It is not easy and requires time and patience, consistent effort, and perseverance after relapsing (which inevitably happens). It is easy just to give up.

In many respects, the Islamic finance industry ended 2013 on a high. Hubs are growing, interest is increasing, demand is strengthening both on the retail and corporate side. The most pleasing aspect of Islamic finance’s inexorable rise is that more governments are seeking to incorporate Islamic finance into their systems, especially emerging markets. Malaysia, Indonesia, the GCC countries, India, Nigeria, and Pakistan are economically growing, and with it, Islamic finance is progressing.

Any movement is always one moment away from collapse if the efforts are not maintained.

Any idea can decay if not upheld by the idealist. But it is always hard to sustain a level of commitment needed to achieve any objective. Challenges constantly manifest themselves, and the successful are those that can overcome these challenges. They cannot submit to laziness or allow entropy.

Businesses, like people, are also susceptible to insouciance, particularly those that are market leaders. Nokia, for instance, was once head and shoulders above all its competitors in mobile telephony. It has now been cannabalised by Microsoft. Nokia became a victim of its own success, failing to see the changes in the market and not adapting.

Businesses need to be aware of the market, as well as awareness of itself. Rising internal costs can eat away at a company even as it portrays a picture of success and calm. Enron quickly comes to mind, Lehman Brothers too.

Regardless as to whether at one moment a company can boast of healthy profits and

So like the individual on Christmas celebrating, then turning towards introspection by New Year’s, a successful business needs to frequently look back, long around, and make resolutions as to how they can be better. Focus, hardwork and patience are needed in order to succeed and continue succeeding.

But I stress that the industry cannot be too cavalier. One needs to balance the positives with perspicacity. This issue of ISFIRE attempts to balance the two. ISFIRE itself is in a constant state of revolution, and we are pleased to incorporate a new section – ISFIRE Insight. The first Insight is on sukuk. However, our focus has not been on the blossoming financial returns that capture the minds of investors. You can read that elsewhere – there is no shortage of sukuk reports. The difference here is that we explore the link between sukuks and the real economy. This is often forgotten, but sukuk’s future success will be dependent on the nexus between corporate liquidity, country infrastructure, business innovation and sukuk returns. A number of leading practitioners and academics discuss sukuk and we review three sukuk and its relationship to the economy.

Meezan Bank, and Ramlie Kamsari, CEO of CIMB-Principal Islamic Asset Management, are in the hotseat this month, and their interviews give an insight into their own professional history and their management practices. This issue ties a lot of ideas together. It concludes with an appeal for the industry to invest in ideas and entrepreneurship and join together investor, idea, entrepreneur and customer.

This is the next step for the industry, which has undoubtedly laid a firm foundation on which to build. But it has to be aware that in the exhilaration of success, there are always ominous clouds. Adaptability is crucial otherwise the industry will be stagnant. The new year brings a time for reflection, and this first issue of the year calls out for greater reflection of the industry and where it needs to go.

Professor Humayon Dar, PhD (Cambridge) Editor-in-Chief

We also have a number of interviews of notable personalities. Irfan Siddiqui, CEO of w w w. i s l a m i c f i n a n c e r e v i e w. c o | 5

ISFIRE Insight

Sukuk and the Real Economy:

Exploring the forgotten link Introduction Sukuk has for years been considered as Islamic finance’s greatest innovation. It can be regarded as pareto optimal in that both investors and the orignators are equally benefited: the former receive a coupon rate and the later receive the needed liquidity.

Moreover, sukuk follow Islamic law making it palatable to the growing number of indiviuals that are concerned about the conduciveness of financial transactions with the Shari’a.

Sukuks are often regarded as Islamic bonds, and no amount of careful rhetorical wordplay can deny that there are similarities with bonds. But like bonds they provide a social function that is often forgotten to the investor searching for profits. Newspapers are replete with information about sukuk being oversubscribed, adumberating the financial profile of sukuk often ignoring that sukuks can, and do, have tangible, real economy effects.

This could be either through the generation of liqudiity to help a bank or a country manage their cashflow or through the funding of infrastructual projects. The famous Qatar Global Sukuk is an example of the latter, issued to help fund the Hamad Medical City, an enclave which will have a women’s hospital,

6 | I sl a m i c Fi n a n ce R e v i e w

a physical medical and rehab facility, an ambulatory building, and a research institute.

This is not to say that the generation of profits for the investor is not important. Investors have two main reasons for investing in financial assets: generating greater income and security for a rainy day. Sukuks can protect an investor’s income.

Thus, one cannot ignore the real benefits that sukuk can deliver. In what follows is a discussion of the effects of sukuk and what it means for the investor and the invested. ISFIRE is fortunate to have practitioners who have worked on sukuk transactions to discuss their experience. We begin by describing the nexus between the real economy and sukuk. As sukuk can play an instrumental role in developing infrastructure, we will embark on a tour of three sukuk issued in Malaysia, Pakistan and Oman respectively. These sukuk have been used to generate funding for housing, transport and commercial ventures and are examples of how sukuk has the potential to propel an economy forward. Following the exposition, the discussion will move to the investor and how sukuk can make a noteworthy contribution to his portoflio. Finally, the discussion will conclude with predictions for the sukuk industry in 2014.

The importance of sukuk Typically, reports on sukuk concentrate on the remarkable growth of the security. Little attention is paid to the way sukuk investments are benefiting domestic economies and the inordinate focus on risk/return profiles ignores the simple reality that both corporate and sovereign sukuk raise funds that can help the originator to invest in the creation of tangible goods and services. We can see from Table 1 that government institutions have issued the most sukuk. The market share of government institutions issuing sukuk is substantially more than any other sector.

After financial services, corporates from transport and the power and utilities sectors have issued second and third highest number of sukuks to develop their projects. Transport includes the development of roads that typically have little monetary value unless a toll is charged. However, the creation of a network of roads, rail lines, airports, and the like help businesses transport goods and services. A strong infrastructure propels an economy forward. Similarly, power and utilities is a necessity to build a thriving economy. A constant problem for emerging markets like Bangladesh and Pakistan relates to power

February 2014 Issue generation. Saudi Arabia is looking to expand generation capacity to keep up with the kingdom’s rapidly growing power demand, which is climbing by around 9 percent per year. Saudi Electricity Co plans to issue sukuk in

Thereafter, the shares plummet. Low market share in information technology, telecommunications, consumer goods, retail food and beverages imply that not enough is being done to encourage innovation and

Table 1 : Global Aggregate Sukuk Issued Breakdown By Sector (Jan 96 – Sept 13) Sector

Number of Issues

Government Institutions

1,356

Financial Services

Amount USD MLN

Market Share

280,523

57.46%

396

61,927

12.69%

Transport

308

35,377

7.25%

Power and Utilities

366

33,342

6.83%

Real Estate

182

24,949

5.11%

Oil and Gas

109

14,613

2.99%

Construction

400

14,307

2.93%

Telecommunications

74

6,039

1.24%

Services

36

3,672

0.75%

Agriculture

92

3,492

0.72%

Conglomerates

14

2,723

0.56%

Food and Beverages

35

2,313

0.47%

Industrial Manufacturing

64

1,536

0.31%

Leisure and Tourism

5

1,361

0.28%

Consumer Goods

39

751

0.15%

Health Care

29

544

0.11%

Mining and Metals

10

442

0.09%

Retail

16

167

0.03%

Education

5

64

0.01%

29

0.01%

Information Technology

7

Total

3,543

488,171

corporations may wish to consider supporting entrepreneurs (just as Google, EBay, Microsoft and Facebook have) by offering a percentage of their revenue as coupon payments. If the idea and product is profitable, governments and corporations can recoup the revenue from the profits generated.

This is simply an idea, and one that is unlikely to catch on! Nevertheless, there are ways in which sukuk can be used, given their multiple structures, to help develop an economy.

Concentration has been on infrastructure, and for emerging markets, this is very important. Greater utilisation of sukuk offered internationally can be a means of pooling money from multiple sources. Building the infrastructure smoothen economic transactions and over time focus can be shifted. For the investor, a thriving economy will extenuate the returns. More emphasis needs to be put on innovation and ingenuity.

Just as Japan, South Korea and even China have shown, it is in these areas, rather than infrastructure, that sustainable growth can be achieved. For these purposes, sukuk can be an effective tool.

100.00%

Source : Thomson Reuters Zawya Sukuk Perceptions and Forecast Study 2014

order to develop capacity in the near future.

The real estate sector has low market share.

While sukuks, particularly ijara sukuks, generate coupons from the usufruct of property, raising funds for the purchase and development of real estate appears to be less popular.

However, this is perhaps a mistaken way of looking at the figures. Purpose developed real estate, for instance in health care, might be captured in another sector. At the same time, we can see that there have been 400 issues of sukuk for construction showing variances between what is considered real estate and developing property.

entrepreneurship. These are the sectors that are traditionally sources of ingenuity and sukuk is an ideal instrument to facilitate the generation of funds. Much of the reason for this is to do with the high risk associated with entrepreneurial ventures. Investors will not be encouraged to invest in projects that could potentially offer little return. Moreover, sukuk tenors are generally quite low with investors clamouring for favourable returns. There is then a gap that needs to be filled in which sukuk can be used to generate necessary funds for entrepreneurs to develop their ideas.

To facilitate this governments and major

Table 2 : Benefits of Sukuk

• •

Sukuk can be used to finance large enterprises.

Sukuk allows an equitable distribution of wealth. Investors benefit from the profits resulting from the enterprise.

•

Sukuk can join different agents of an economy together: government, financial institution, investor and corporate.

• •

Sukuk help the development of infrastructure in emerging markets.

Sukuk can help an investor lower his risk profile in a diversified portfolio.

w w w. i s l a m i c f i n a n c e r e v i e w. c o | 7

ISFIRE Insight

Al Madina Investment Sukuk for the Expansion of Commercial and Residential Space Oman is the last GCC country to offer Islamic finance to their people in 2012.

As a newcomer to the industry, it would have been expected that progress would be gradual. This has not been the case. Regulators and banks have been working tirelessly to create the infrastructure necessary for a thriving Islamic financial industry. Already, Oman has two fully-fledged banks offering Shari’acompliant services, while a number of conventional banks have also forayed into the sector by setting up Islamic windows to capture a slice of the market.

Oman has already issued its first sukuk that generates funds to enhance the development of a multi-purpose complex. Al Madina Investment was the arranger. Mr Mohsin Shaik bin Sehu Mohamed, Head of Islamic Finance at Al Madina Investment, discusses the issuance of the first sukuk in the Sultanate.

Recent developments in the sultanate can be considered an impressive achievement for a market barely a year old. Like in other parts of the world, the Omani market has shown an enthusiasm in offering Islamic products and services to consumers and corporates.

However, all of the concentration has been on the normal banking activity, i.e. typical consumer and corporate banking facilities.

The mandate In late November 2012, we were requested

by Tilal Development Company (TDC) to pitch for an advisory role on their funding needs. TDC - 40% owned by Qatar Investment Authority (QIA) - was the company responsible for the development of the Tilal Complex in Muscat. The Tilal Complex is the one and only mixed-use development in Oman, featuring a shopping complex known as Muscat Grand Mall, office towers and residential complex.

8 | I sl a m i c Fi n a n ce R e v i e w

February 2014 Issue

The structure and road shows

Islamic finance.

For any sukuk structure, the most important ingredient is the underlying asset. In this case, Muscat Grand Mall represented the underlying asset for the transaction. Considering this asset and the nature of TDC’s business, Al Madina opted for an ijara structure.

Many of the pension funds, banks and companies visited have shown genuine interest in investing in sukuk. Some of them even immediately expressed commitment to support the TDC sukuk.

As an obligor in the ijara structure, TDC registered a special purpose vehicle (SPV) in Oman to facilitate the issuance. The sukuk of OMR 50 million (USD 130 million) has a maturity of five years and pays a rental (coupon) of 5% per annum.

The most unique item for this sukuk is that there is a legal mortgage created on the Muscat Grand Mall favoring the sukuk holders.

The purpose of the legal mortgage is to provide confidence to the local investors given that sukuk is totally new to the market. TDC was supportive enough to provide this.

Following the selection of the structure came the drafting of the prospectus and legal documents, which had to comply with local regulations. While this process was taking place, Al Madina embarked on the road shows marketing to pension funds and banks in Oman. The marketing process had a dual effect: it informed potential investors of the sukuk and it also educated potential local investors on

The issuance The issuance date for the TDC sukuk was October 30, 2013, nearly 11 months since Al Madina received the mandate. This was an historic day for Oman’s Islamic finance sector.

On that day, TDC and other stakeholders executed all the legal documents. Legal opinion was issued and funds were transferred from investors to the transaction account.

Finally, TDC became the first corporate to issue a sukuk in Oman.

For the issuance of this sukuk, Al Madina played the main role as the principal advisor. Along with Bank Nizwa SAOG, Al Madina also served as one of the joint lead arrangers and joint lead managers. Bank Dhofar SAOG and Qatar International Islamic Bank also participated as joint lead managers.

TDC hopes to expand and improve the development from receipts of the sukuk.

Al Madina Investment SAOG (Al Madina) has been in operation since 1998, providing investment banking services but has recently ventured into Islamic finance following the royal decree. Al Madina received a mandate from TDC to structure a sukuk, besting the proposals of a regional bank and two local banks. This was the beginning of Oman’s first sukuk journey.

What’s next?

Because sukuk was relatively new in Oman, a local regulatory framework for this type of sector is currently not available. Although the country’s Capital Market Authority (CMA) is in the process of preparing a sukuk regulation draft, there is no information as to when this will officially be introduced. Nevertheless, as a strong supporter of Islamic finance, CMA gave Al Madina the go-ahead to proceed with the proposed sukuk for TDC and use the existing bond regulation as a guide provided that it complies with both Shari’a and legal requirements.

This was the first step. The next steps were to appoint a rating agency, Shari’a advisors and legal advisors. Morgan Lewis and Bockius acted as the lead legal counsel advising Al Madina supported by a local Omani firm Al Busiady, Mansoor Jamal & Co, who advised on the local regulations. Meanwhile, Trowers & Hamlins acted on behalf of TDC and Amanie Advisors provided their services as the Shari’a advisor for this issuance. Capital Intelligence provided a rating of BBB+ for the issuance.

ISFIRE Comment Issuing the first sukuk in any country is always a milestone because it paves the way for further issues. How the country reacts thereafter cannot be easy to gauge. International Innovative Technologies, a technology company based in the UK, issued a corporate sukuk in 2010, yet the UK sukuk market remains in stasis. Government support cannot be understated and so it is refreshing to see Oman take a proactive stance to the development of the sukuk industry. The CMA has issued draft sukuk rules and the government of Oman have stated that they are seeking to issue a sovereign sukuk in 2014. So all the signs are pointing in the right direction.

Still, abecedarian governments and regulators need the assistance of experienced institutions to help it determine the framework needed for the industry to thrive. An important aspect of the globalised world is the advice of private and public entities in fostering transactions. Sukuk is no different, and we can see with Al Madina sukuk the confluence of parties such as US law firm Morgan Lewis and Bockius and Qatar International Islamic Bank in contributing to the structuring of the sukuk. Bringing in international parties pushes Oman into the international arena, and can encourage foreign bodies and firms to take a deeper look into Oman as a locus of investment.

Al Madina sukuk was mainly marketed to local investors. As the sukuk industry matures, it is likely that sukuk marketing will branch out to foreign parties thereby channelling a greater of pool funds and diversifying the risk. The Oman government are looking to invest in major infrastructural projects and so greater outreach through sukuk issuance will undoubtedly benefit the Sultanate. Before this can be achieved, the humdrum requirements of regulations, laws, standards and delineated procedures need to be put in place.

In many respects, the Al Madina sukuk was a test case, and one that has shown much promise.

TDC's flagship Tilal Complex is the first of its kind mixed-use development in the Sultanate and boasts a healthy amalgamation of residential, retail and business space. To expand the space was to encourage greater commerciality through retail improvement and business growth. It is perhaps emblematic of the intent of Oman to compete effectively with its neighbouring GCC competitors. While not as garish, Oman is certainly ambitious but are adopting a more cautious and incremental approach to economic growth. More issues of medium to long term sukuk marketed expansively are likely to offer a modest return, but backed by stable assets. This will coincide with the government’s measured approach. w w w. i s l a m i c f i n a n c e r e v i e w. c o | 9

ISFIRE Insight

Ijara Sukuk to Help Sovereigns to Generate Funds The sukuk of choice in Pakistan has been based on the ijara, a structure that was favoured by Mufti Taqi Usmani in his pivotal and game changing paper “Sukuk and its contemporary applications”. The sovereign sukuk has been a means by which the Pakistani government have generated funds. Bushra Shafique, Deputy Director at the State Bank of Pakistan, provides insights into the issuance of sovereign sukuk in Pakistan.

Pakistan joined the sukuk market in 2005 with the issuance of an international sovereign sukuk. Since then 74 sukuk valued at more than Rs.620 billion (US $ 5.87 billion) have been issued. There have been 15 sovereign Government of Pakistan (GOP) sukuk and 59 corporate or quasi-sovereign entities. In line with international trends, corporate sukuk represented a major share of the domestic sukuk market until March 2009 after which sovereign sukuk rose and corporate sukuk started to decline. At present ijara based sovereign sukuk dominate with more than 84 percent share.

Sovereign sukuk issuance in Pakistan International sovereign sukuk The very first sovereign sukuk issued in Pakistan in 2005 was a dollar denominated ijara-based international sukuk that was listed on the Luxemburg stock exchange. This five year sovereign sukuk of US$600 million was issued against M-1Motorway from Peshawar to Islamabad with CitiBank and HSBC being lead managers. The sukuk (B+ rated by Standard & Poor) offered semi-annual floating rate of return of LIBOR+ 220 bps, and attracted around US$ 1.2 billion. The demand for this sukuk came from diverse geographic locations and from both conventional and Islamic financial institutions (Table 3).

Domestic Sovereign Sukuk The domestic market for sovereign sukuk took 10 | I sl a mi c Fi n a n ce R e v i e w

off in September 2008 with an issuance of a Rs.6.5 billion (US$ 0.062 billion) sukuk. Since, 14 issues with a volume of Rs. 501 billion (US $ 4.75billion) have been offered. The structure of these sukuk was based on the ijara principle (details are given below) and each issue was approved by the Shari’a Board of the State Bank of Pakistan (SBP).

General structure of domestic ijara sukuk 1. The assets to be used by the government for issuance of sukuk are identified and

evaluated by two independent evaluators who are approved by Pakistan Banks Association (PBA). The lowest among two evaluations is used to determine the sale price of the identified asset.

2. SBP conducts an auction. All banks (Islamic as well as conventional) are allowed to participate in the auction.

3. The identified investors appoint a special purpose vehicle (SPV), Pakistan Domestic sukuk Company Limited (PDSCL) as their agent.

Table 3 : Geographic Distribution of GoP International Sukuk Percent Investors Central Banks and Government

25

Asset Managers

23

Islamic institutions

20

Banks

18

Others*

14

Geographic Location Middle East

47

Asia

31

Europe

22

* Private banks, retail intermediaries and insurance companies and corporates Source : IIFM Sukuk Report 1st Edition, 2010

4. The SPV (PDSCL), as an agent of the investors, uses the proceeds from the sukuk subscription to purchase assets from the government.

Accordingly the risks and rewards of the asset ownership are passed on to the investors.

5. The utilization of the sale proceeds of the assets by the government are utilized in Shari’a permissible ventures.

February 2014 Issue

6. A declaration of trust is executed on the purchased assets in favor of the investors and sukuk are issued evidencing undivided ownership of these assets by the investors.

7. The SPV (PDSCL) on behalf of the investors leases the assets to the government for a fixed period. The sukuk investors receive lease rentals regularly as return on their investments in the sukuk assets. The government can also be appointed as service agent for the investors (sukuk holders/lessor) to undertake the servicing (e.g. major repair and maintenance, etc.) of the assets during the term of the lease.

8. At maturity, the SPV sells the assets to the government at an agreed price and sukuk are redeemed using the sale proceeds of the assets.

These are general details of the structure.

Some minor deviations may be found in each of the domestic sovereign sukuk depending upon the nature of the assets and legal status of the entities involved. A series of agreements including Sukuk Subscription Undertaking, Sukuk Issuance Undertaking, Purchase Agreement, Declaration of Trust, Agency Agreement, Ijara Agreement, Service Agency Agreement and Purchase Agreement are executed by the parties involved (i.e. government, investors and their agents.) whereby role and responsibilities of all the parties are described along with their associated risks.

announced by SBP prior to the start of each half year.

maturity; however they are transferable and can also be traded in the secondary market.

4. The sale of the sukuk is done by auction to Islamic banks and to the primary dealers as determined by SBP and therefore the bidding is also allowed only in the manner specified by SBP.

7. Individuals, institutions, trusts, funds of all types, corporate bodies including banks, non-banking finance companies, insurance and takaful companies irrespective of their residential status can hold sukuk.

5. The sukuk are script less and are registered with SBP.

8. Payment of sukuk represents payment obligations of the government of Pakistan on account of the payment of rentals in respect of assets held on trust by and leased from

6. The sukuk are not redeemable before

Ijara sukuk rules The Government of Pakistan Ijara Sukuk Rules 2008 governs the issuance of sovereign sukuk. According to these rules: 1. The maturity period of the first sukuk is three years from the date of issue. Later, the company may issue sukuk having longer or shorter maturity periods but the shortest period shall not be less than one year as notified by the State Bank of Pakistan.

2. The sukuk is issued in multiple of one hundred thousand rupees where each sukuk represents an undivided ownership of the asset.

3. The profit on the sukuk is paid bi-annually in accordance to the rental rate

Table 4 : Domestic Ijara sukuk by the Govt. of Pakistan (million US $)* Series

Action

Issue Date

Maturity Date

Amount of

Asset Against Sukuk

Status

Sukuk S-1

S-2

S-3

S-4

GOP Ijara sukuk - 1

26/09/2008

26/09/2011

62

GOP Ijara sukuk - 2

29/12/2008

29/12/2011

57

GOP Ijara sukuk - 3

11/03/2009

11/03/2012

145

GOP Ijara sukuk - 4

17/09/2009

17/09/2012

136

GOP Ijara sukuk - 5

15/11/2010

15/11/2013

491

Jinnah International

GOP Ijara sukuk - 6

20/12/2010

20/12/2013

352

Airport ,Karachi

GOP Ijara sukuk - 7

07/03/2011

07/03/2014

450

GOP Ijara sukuk - 8

16/05/2011

16/05/2014

434

GOP Ijara sukuk - 9

26/12/2011

26/12/2014

666

GOP Ijara sukuk - 10 02/03/2012

02/03/2015

361

GOP Ijara sukuk - 11

30/04/2012

30/04/2015

281

GOP Ijara sukuk - 12 28/06/2012

28/06/2015

462

GOP Ijara sukuk - 13 18/09/2012

18/09/2015

445

GOP Ijara sukuk - 14

28/03/2016

408

28/03/2013

M-3 Motorway

Matured

Outstanding M-2 Motorway

M-1 Motorway

Total GOP Ijara sukuk

4751

Total Outstanding GOP Ijara sukuk on 30/03/2013

3507

*Dollar-Rupee Exchange Rate for this table is 105.55 w w w. i s l a m i c f i n a n c e r e v i e w. c o | 11

ISFIRE Insight Rentals of these floating instruments are linked with 6 month T-bill rate while the rent is paid on a bi-annual basis.

All issues of domestic sovereign sukuk till date are for a tenor of three years. All four series of sukuk were oversubscribed. However, among the 14 issuances only four– first, second, sixth and tenth - were undersubscribed. It is important mentioning here that issuance of sukuk, especially issuances since 2010, assisted Islamic financial Institutions in their liquidity management capacity and improving asset quality.

Over the last couple of years, the government of Pakistan has resorted to issuance of sovereign sukuk for much needed funds. Both Islamic and conventional financial institutions have shown tremendous interest in them.

The success of these sovereign sukuk is likely to encourage the government to raise funds from such sources in order to meet its developmental goals. Against this backdrop of interest from both the demand and supply side, it is expected that the domestic sukuk market is likely to remain buoyant. the company; and on account of payment of purchase price to the company for purchase of asset at the time of maturity.

9. The sukuk is Statutory Liquidity Requirement (SLR) eligible for Islamic as well as conventional banks and can also be accepted by the banks and financial institutions as collateral for the purpose of financing.

10. The profit earned on the sukuk is liable to income tax in accordance with the laws of Pakistan. Withholding tax on the sukuk is deducted at the rate of ten percent at source.

However, there is no compulsory deduction of zakat at source.

Status of domestic ijara sukuk In the last five years, since the issuance of first domestic sukuk, four series containing a total of 14 auctions amounting to Rs. 501 billion (US$ 4.75 billion) have been issued on the basis of a Master Ijara agreement; at present the outstanding amount is Rs.370 billion (US$ 3.5 billion) (Table 4). Three of these series S-1, S-2, and S-4 were based on three motorways, Faisalabad-Pindibhattian Motorway (M3), Lahore-Islamabad Motorway (M2) and Islamabad-Peshawar Motorway (M1) respectively while S-3 was based on Jinnah International Airport, Karachi. In accordance to GOP Ijara Rules 2008 all of these sukuk issues are redeemable only at maturity though these can be traded on the secondary market.

12 | I sl a mi c Fi n a n ce R e v i e w

ISFIRE Comment The government of Pakistan has been running a huge budget deficit – at present Rs1.77 trillion or 8.6% of GDP – and it would have been wiser if the current government had been prudent with respect to borrowing. It, however, persisted in borrowing in order to meet its public sector borrowing requirements (PSBR). Ignoring the ill effects of public debt, Islamic banks in the country see it as a great help from the government to allow them to have access to a government security for their liquidity management. Furthermore, the government’s involvement in Islamic banking and finance as an issuer of such Shari’a-compliant securities is expected to develop and deepen an Islamic capital market, which is deemed as vital for the future growth of Islamic banking and finance in Pakistan.

Those who object to the use of sukuk to raise money for PSBR are at best exaggerating the gravity of the issue. Realising the potential of sukuk in deepening capital markets, especially for the benefit of the Islamic banking sector, the Securities and Exchange Commission of Pakistan last year issued new guidelines for the issuance of sukuk. It was hoped that bringing regulatory certainty to the processes and procedures would spur interest from foreign investors, especially in neighbouring GCC countries. Those who are creating dissenting voices to the use of sukuk by the government are in fact harming the cause of attracting foreign capital into the economy.

In the medium to long run, sukuk can be used as an instrument to discipline public sector borrowing, as sukuk requires an asset to be used to raise financing. This requirement is an inbuilt mechanism to restrict an issuer’s (including the government’s) ability to borrow money freely.

In the past, the government used the M2 motorway to raise $600 million through an ijara sukuk (based on leasing) for a period of five years (2005-11). Those who are against the use of Quaid-e-Azam International Airport Karachi for the issuance of sukuk last year must keep in mind that this structure is far safer than the previous M2 sukuk, which was offered to international investors.

The government remained adamant that it would not allow the investors (sukuk holders) any recourse to the underlying asset (M2 motorway). The Karachi airport sukuk also does not provide recourse to the Sukuk holders in case of sovereign default (although from Shari’a viewpoint is it better to give the investors recourse to the underlying asset). So, any fears that the government is endangering assets of national security by channeling it to the private sector are ill informed.

UUM Islamic Business School UNIVERSITI

U TA R A

M A L AY S I A

GLOBAL AWARD WINNING PROGRAM 2013 (Bachelor of Islamic Finance & Banking (BIFB) UUM) by: GIFA (Global Islamic Finance Awards)

AcAdemic ProgrAmmes : • Bachelor of Islamic Finance and Banking– BIFB (Hons) with Islamic Financial Planner (IFP) AWArd WiNNiNg ProgrAmme

UUM is offering 39 undergraduate and 52 postgraduate programmes. For further information: www.uum.edu.my

• Bachelor of Muamalat Administration BMA (Hons)

UUM Islamic Business School (IBS) is a leading centre for excellence in Islamic Finance and Management at UUM.

• Master in Islamic Finance and Banking (MIFB) • Master in Islamic Business Studies by Research (MIBS) • MSc (Islamic Finance) by research • MSc (Islamic Banking) by research • PhD -

Shariah Advisory and Muamalat Islamic Management Islamic Banking & Finance Islamic Economics

www.uum.edu.my www.ibs.uum.edu.my Tel : 604-928 6655 / 6651 /6658 / 6661 • Fax : 604-928 6653

IBS is also proud of its position as the first Islamic business school in the region that has a comprehensive pool of lecturers in various aspects of Islamic Business Management.

ISFIRE Insight

Generating Liquidity in the Housing Market by Using Sukuk in Malaysia Cagamas has been instrumental in developing liquidity to primary lenders in the housing market in Malaysia. It purchases housing loans, hire purchase and leasing debts, industrial property loans, credit card receivables, through raising funds by the issuance of debt securities such as bonds and sukuk. Mr Chung Chee Leong, CEO of Cagamas, walks us through Cagamas Berhad’s RM3.8 billion (USD1.2 billion) Islamic Medium Term Notes, a structure noted for its innovative properties.

Cagamas Berhad (“Cagamas”) successfully completed the issuance of RM3.8 billion (in nominal value) Islamic Medium Term Notes (IMTN) on 28 October 2013 in the form of sukuk commodity murabaha, pursuant to Cagamas’ RM40 billion Islamic/Conventional Medium Term Notes Programme (MTN). The proceeds of the issuance were utilised to fund the purchase of Islamic finance assets from the financial system.

The MTN Programme is rated AAA by RAM Rating Services Berhad (“RAM”) and Malaysian Rating Corporation Berhad (“MARC”), reflecting Cagamas’ systemically important position within the domestic capital markets, robust asset quality and strong capitalisation.

Amidst the challenging market environment, the transaction was announced on 16 October 2013 and the book opened in the afternoon trading session of the same day with an initial size of RM2.5 billion with an option to upsize.

Robust demand saw the book approach a subscription rate of more than 3.2 times at close of trading session on 16 October 2013.

14 | I sl a mi c Fi n a n ce R e v i e w

Who are Cagamas?

Cagamas Berhad (Cagamas), the National Mortgage Corporation, was established in 1986 to promote the broader spread of house ownership and growth of the secondary mortgage market in Malaysia. It issues debt securities to finance the purchase of housing loans from financial institutions and non-financial institutions. The provision of liquidity to financial institutions at a reasonable cost to the primary lenders of housing loans encourages further expansion of financing for houses at an affordable cost. The Cagamas model is well regarded by the World Bank as a successful secondary mortgage liquidity facility. Cagamas is the leading issuer of AAA debt securities in Malaysia as well as one of the top sukuk issuers in the world.

This led to an upsized amount of RM3.8 billion, which represents the single largest Ringgit book building exercise to-date.

The RM3.8 billion book was closed at the end of the morning trading session on 17 October 2013. Cagamas’ strong credit and the overwhelming support of investors resulted in most of the tranches being priced at the low end of the price guidance. The notably accelerated 1-day duration of the book building exercise serves as testament to investors’ high confidence with Cagamas’ credit and continued strong appetite from investors

for issuers with sound credit fundamentals such as Cagamas.

The deal, which marked the largest issuance to-date by Cagamas since its incorporation in 1986 attracted interest from a diverse group of domestic and international investors, with a strong order book of approximately RM8.0 billion comprising more than 50 investors.

The RM3.8 billion issuance size consists of a total of eight (8) tranches as shown in Table 5. The investors’ breakdown is shown in Diagram 1.

February 2014 Issue

partnership) and istina’a (order sale).

Table 5 : Cagamas’ RM3.8 billion Sukuk Commodity Murabaha Issue Size (Nominal Value) (RM million)

Tranche

Tenure (Year)

Profit Rate (%)

1

360

1

3.40

2

275

3

3.65

3

330

5

3.95

4

390

7

4.15

5

645

10

4.30

6

450

12

4.55

7

675

15

4.75

8

675

20

5.00

Total

3,800

Diagram 1: Investor Breakdown by Allocation Investor Breakdown by Allocation

FM - FOREIGN 2%

CORP 2%

Single largest AAA-rated sukuk Commodity Murabaha issuance for the year; and

Background of the sukuk commodity murabaha Cagamas obtained approval for its RM60 billion MTN and CP programme in June 2007. The programme was available to Cagamas under both Islamic and conventional and was the largest funding programme

BANK 41%

INS 15%

book building exercise;

Single largest Ringgit book building exercise done for the year.

FM LOCAL 8%

GVT PF 32%

One month after the approval, Cagamas entered into a memorandum of participation with Bursa Malaysia’s Bursa Suq Al-Sila, enabling Cagamas to use this platform for future sukuk murabaha issuances. Since then, Cagamas has moved towards issuing sukuk murabaha in line with global Shari’a standards.

* FM – Fund Manager

Cagamas has cummulatively refinanced housing loans in the secondary market equivalent to RM104 billion or around 1.7 million houses Houses in Millions 1.8 1.6

12

1.4 10

1.2

8

1

6

0.8 0.6

4

0.4 2

0.2 1987

1989

1991

1993

1995

1997

1999

Annual Total Purchases

In addition to being successfully priced at competitive levels, the notable “firsts”, which this deal achieved includes: Single largest issuance in Cagamas’ 26-year history;

Single largest issuance from Cagamas via a

2001

2003

2005

2007

2009

Description of the Sukuk Structure (1) Cagamas, as Agent (“Wakeel”) of Sukuk Investors, purchases commodity (Crude Palm Oil) on a spot basis from Vendor A at Purchase Price.

(2) Cagamas (“Issuer”) issues Sukuk to Investors to evidence their ownership of the commodity (3) & (4) Proceeds received from the Sukuk Investors are used or deemed to have been used to pay the purchase price of the commodity

Diagram 2: Cagamas role in the housing market

RM Billion 14

In August 2008, Cagamas issued its first sukuk murabaha amounting to RM2 billion under the IMTN programme, representing the largest domestic deal for 2008. The sukuk were offered in multiple tranches representing the different tenures of one, two, three, five, seven, ten, twelve, fifteen and twenty years. In addition, Cagamas also issued RM540 million of one, two, three, five, seven, twelve and twenty year conventional MTNs at the same time. Diagram 3 illustrates the mechanics of Cagamas’ sukuk Commodity Murabaha.

2011

0

Cumulative Total Loans

established not only in Malaysia but also in Asia.

The programme allowed Cagamas to utilise multiple Shari’a concepts: murabaha, ijara, musharaka, mudaraba (profit-sharing

(5) Sukuk Trustee, on behalf of the Sukuk Investors, sells the commodity to Cagamas at Sale Price repayable on a deferred payment basis (6) & (7) Cagamas sells the commodity to Vendor B on a spot basis at Selling Price.

Proceeds received from the sale of commodity are used to fund Cagamas’ Islamic operations (8) & (9) Cagamas makes periodic profit distribution (e.g. semi-annual basis) to the Sukuk Trustee on account of its obligation to pay the Deferred Sale Price Upon maturity, Cagamas will pay the Sukuk Trustee the principal to redeem the sukuk In August 2010, Cagamas issued a variablerate sukuk murabaha for RM230 million. The sizeable AAA-rated variable-rate sukuk issuance provided a benchmark in the market and expanded the fixed income product suite for investors. At the time of the issuance, it was the largest variable-rate ringgit sukuk in the market. Since the first issuance, Cagamas has w w w. i s l a m i c f i n a n c e r e v i e w. c o | 15

ISFIRE Insight murabaha trading,

Table 6: Conventional and Islamic IMTN issued in August 2008 Tenure Years

Conventional (RM million)

Islamic (RM million)

Coupon/Yield (%)

1

200

320

4.05

2

25

95

4.25

3

30

105

4.60

5

70

215

5.00

7

60

215

5.30

10

0

155

5.80

12

65

235

6.00

15

0

305

6.35

90

370

6.50

540

2,015

20

continued to issue variable rate sukuk.

illustrates the variable-rate sukuk commodity murabaha structure at each profit payment before maturity.

Variable-rate sukuk Murabaha is an Islamic instrument with an adjustable profit rate pegged to the KLIBOR. With the adjustable profit rate feature, Cagamas is required to undertake commodity murabaha transaction at each profit payment. The new commodity transaction is to facilitate the new deferred sale price for the next profit payment. Diagram 4

At each profit payment date (before maturity), 1. Cagamas (as Agent) receives the Deferred Sale Price (Principal + Profit). The Profit portion will be distributed to the sukuk investors and when there is a request for a new commodity

Diagram 3: Cagamas sukuk Commodity Murabaha

Vendor A

(1) Purchases Commodity on Spot

(2) Issues Sukuk

Sukuk Investors

Cagamas Issuer/ Agent

(3) Proceeds

(9) Periodic Profit Payments

ts en

t

fi Pro

ym Pa

at ity d rio mo ice Pe om le Pr C (8) lls Sa (6) Sells Se ed Commodity (5) ferr De on Spot

Sukuk Trustee

16 | I sl a mi c Fi n a n ce R e v i e w

(4) Purchase Price

dic

(7) Selling Price

Vendor B

2. Cagamas (as Agent) will use the Principal portion to purchase new commodity from Vendor A on a spot basis; and 3. Subsequently sell the commodity to Cagamas (as Purchaser) at a new Deferred Sale Price 4. Cagamas will then sell the commodity to the Vendor B on a spot basis Cagamas has since continued to issue sukuk commodity murabaha under the programme.

As at 30 November 2013, Cagamas has RM12.01 billion sukuk commodity murabaha with different tenures outstanding.

Innovation The sukuk murabaha issuance brought two different innovations in the market. First, it was the first large-scale sukuk commodity murabaha for the Malaysian market using

February 2014 Issue

the Bursa Suq Al-Sila platform. At the time of Cagamas’ issuance, sukuk murabaha was not as widely used in the Malaysian market as compared to BBA sukuk. Thus, Cagamas encouraged the market to move towards primary market structuring that meet global Shari’a standards. Since then, a substantial number of sukuk murabaha have been

issued in the Malaysian market. Second, the transaction introduced a new underlying asset for the global commodity murabaha market: Crude Palm Oil. Prior to this, commodity murabaha transactions normally would use non-precious metals purchased from the London Metal Exchange or international commodities brokers.

Diagram 4: Variable rate sukuk commodity murabaha structure at each profit payment before maturity

Vendor A Purchases Commodity (2) on Spot

Sukuk Investors

(1) Profile Payments

Purchase Price

Cagamas Issuer/ Agent

(1) Deferred Sale Price

Cagamas Purchase

(3) Sells Commodity at Deffered Sale Price Sells Commodity (4) on Spot

Selling Price

Vendor B

ISFIRE Comment It is accepted that Malaysia has the most comprehensive Islamic financial market in the world.

No other country can boast of such a mature legal and regulatory infrastructure that accounts for all the various aspects of the Islamic financial industry. This is not to say that improvements cannot be made, but like any other sector, it is constantly evolving. The recent promulgation of the Islamic Finance Services Act shows a country assured, positive and committed to the industry.

A stated aim of Cagamas is to develop the Islamic finance industry, which may perplex some.

Cagamas’ model embraces the usage of bonds to buy household mortgages. But in the evolution of Islamic finance in any country which has entrenched within a strong and productive interest based financial sector, removing oneself completely would be a costly mistake for the country.

Instead, important domestic organisations such as Cagamas can be a bulwark through which Islamic financial principles and practices can spread through the system. One can see the importance of Freddie Mac and Fannie Mae in the USA and similarly Cagamas can play an instrumental role.

Malaysia’s own economic progress has been overshadowed by the spectacular success of China.

It cannot be denied that Malaysia itself has been far more cautious in paving its own way forward, but this measured approach still has the trappings of economic change. Turning from an agrarian economy to a service based one will lead to a change in culture and habitation.

More ambitious individuals looking for prosperity within the city will inevitably lead to more nuclear families and individual habitation. This puts pressure on housing demand and stock leading to an increase in house prices. Therefore, linking investor with bank and then to buyer carefully recalibrates prices as banks will have the liquidity from which to deploy funds so making it cheaper and more price sensitive for buyers. The Cagamas sukuk helps to achieve this and indirectly allows Islamic finance to support economic growth. w w w. i s l a m i c f i n a n c e r e v i e w. c o | 17

ISFIRE Insight

Analysis of the Sukuk in an Investment Bond Portfolio So far we have only considered sukuks and their impact on an economy. For an investor, their concern will be more on generating a healthy return and minimising risk. Sukuk achieves both. In her research, Farah Daghestani finds that sukuk when added to an investor’s portfolio helps reduce risk but does not result in stronger returns. Here we partially reprint her research.

Objectives

Methodology

It is not an easy process for portfolio managers to meet specified investment goals for the benefit of investors. Fixed income securities have several features that many investors ignore as most investors think that investing in fixed income securities such as bonds is safe.

They do not grant sufficient attention to the risk involved, content with receiving a regular coupon payment.

The chosen VaR for evaluating risk is widely applied in this area to identify the benefit from diversification. VaR measures the worst expected loss of a portfolio over a certain holding period at a defined confidence level under normal market conditions within a limited time horizon. VaR became a

The aim and objective of the research is to estimate the risk of sukuk through estimating the risk of a portfolio consisting of both sukuks and conventional bonds and comparing it to the risk estimation of a portfolio consist of conventional bonds only. The focus of the investigation is the introduction of sukuk to a bond portfolio and whether it creates any diversification benefits to investors by minimising the risk. To ascertain this, I compare a mixed portfolio (with sukuk) to an investment portfolio of conventional bonds only during and after the 2007 financial crisis using Value at Rrisk method (VaR). VaR measures the expected maximum loss which can occur over a specified time period for a set level of probability and a given statistical confidence level.

18 | I sl a mi c Fi n a n ce R e v i e w

standard measure of portfolio risk over the last decade and is now heavily used in risk management. It is a vital method for setting capital requirements for banks. Its’ success can be attributed to three reasons. First, this risk measure is highly intuitive and closely related to investor’s goals. Second, VaR does not depend on any specific assumptions about return distributions or risk aversion.

The third and most crucial reason VaR is that Basel II accord on banks equity requirements suggests the usage of VaR. Consequently, VAR can be considered as a standard instrument in assessing portfolios and credit risk. Moreover, the VaR-method works across different asset classes such as stocks and bonds. With this method it is possible to measure the aggregated risk of a diversified portfolio.

February 2014 Issue

To calculate VaR, there are many different approaches. The Asset Normal Approach is the basic approach in calculating VaR and is based on historical bond prices. It assumes that the respective values of the position in the portfolio are normally distributed. I have chosen this approach as the percentage change in the bond/ sukuk price would reflect the change in the value of the entire portfolio position and therefore in possible future losses.

The sample of the study comprise of UK conventional bonds and global sukuk issues.

UK bonds were selected as a benchmark in the study due to the stability of the economy.

For sukuk; the publicly traded issues only were selected from different countries as most of the trades is restricted to primary market and only in a few cases is secondary market data is available.

Table 7 : Portfolio Sample SET 1 Portfolio 1 (Bonds) Name

GBP

Portfolio 2 (Bonds+Sukuk)

Issue Size (M)

Weights

BANK OF SCOTLAND

829.60

0.46

TELEREAL SECUR

370.00

VODAFONE GROUP

540.19

TUBE LINES FIN Total

Name

GBP Issue Size (M)

Weights

BANK OF SCOTLAND

829.60

0.27

0.20

TELEREAL SECUR

370.00

0.12

0.30

VODAFONE GROUP

540.19

0.18

76.75

0.04

TUBE LINES FIN

76.75

0.03

1,816.54

1.00

DP WORLD SUKUK

746.58

0.24

DANA GAS

484.59

1.00

1,816.54

1.00

Total SET 2 Portfolio 1 (Bonds) Name

GBP

Portfolio 2 (Bonds+Sukuk)

Issue Size (M)

Weights

BARCLAYS BK PLC

666.10

0.30

TESCO PLC

515.00

BRITSH TEL PLC

GBP Issue Size (M)

Weights

BARCLAYS BK PLC

666.10

0.21

0.25

TESCO PLC

515.00

0.16

500.00

0.23

BRITSH TEL PLC

500.00

0.16

NEXT PLC

300.00

0.14

NEXT PLC

300.00

0.09

SOUTHERN GAS NET

215.00

0.10

SOUTHERN GAS NET

215.00

0.07

2,196.10

1.00

PERUSAHAAN PENER

445.49

0.14

ALDER SUKUK FUND

521.66

0.16

3,163.25

1.00

Total

Name

Total SET 3 Portfolio 1 (Bonds) Name

GBP

Portfolio 2 (Bonds+Sukuk)

Issue Size (M)

Weights

ASPIRE DEFENCE

884.08

0.43

HSBC BANK PLC

350.17

0.17

Name

GBP Issue Size (M)

Weights

ASPIRE DEFENCE

884.08

0.32

HSBC BANK PLC

350.00

0.13

GREENE KING FIN

320.16

0.16

GREENE KING FIN

320.00

0.12

VODAFONE GROUP

250.00

0.12

VODAFONE GROUP

250.00

0.09

NEXT PLC

250.00

0.12

NEXT PLC

250.00

0.09

2,054.08

1.00

CBB INTER SUKUK

458.31

0.17

RAK CAPITAL

242.85

0.09

2,755.23

1.00

Total

Total

The database sample used in this study comprises of three sets of portfolios.

The first portfolio is a Conventional Bond Portfolio, which consists of United Kingdom corporate bonds issues collected from 2002-2012. The Second Portfolio consists of a mix of UK conventional bonds and global sukuks. The sukuk issues collected are corporate sukuks. The sukuk issues are collected for the same period from Muslim courtiers such as Bahrain, Qatar, UAE, Kuwait, Saudi Arabia, Pakistan, Indonesia and Malaysia . Three sets of portfolios were created from the sample. The first set consists of two portfolios.

The first portfolio consists of four bonds and the second portfolio consists of the same four bonds of the first portfolio plus two sukuks.

The second and third sets each consist of two portfolios. The first portfolio has five bonds and the second portfolio includes the first portfolio plus two sukuks. (table 7)

Analysis VaR was computed for a portfolio value of £50 million. The results show a VaR of £9.6 million for

w w w. i s l a m i c f i n a n c e r e v i e w. c o | 19

ISFIRE Insight

Table 8: Results of VaR and Monthly Expected Returns Portfolios

VAR

Expected Return

Bonds

18.4

0.294%

Sukuk and Bonds

27.7

0.261%

12.7

0.40%

9.6

0.36%

Bonds

16.2

0.65%

Sukuk and Bonds

13.0

0.52%

SET 1

SET 2 Bonds Sukuk and Bonds SET 3

the second set of bond and sukuk portfolio.

One can expect the loss on the market value of the portfolio will not be larger than £9.6 million or 9.6% of its value 99% of the time (as of end-June 2012). It also means that there is a 9.6% chance that the loss could be larger than £ 9.6 million for a period of 35 months.

The corresponding figure for the non-sukuk or conventional bond portfolio stands at £ 12.7 million VaR. Therefore, the introduction of sukuk amounts to a 4.1% reduction in VaR in the conventional bond portfolio. To compare the estimation, the third set shows that sukuk reduces VaR by £3.2 million giving VaR of £13 million for the mix conventional bond and sukuk portfolio and a VAR of £16.2 million for the conventional bond portfolio.

The same results can be seen for sets two and three. The sukuk and conventional bond portfolio shows a VaR of £28.7 million losses compared to £18.4 million for the conventional bonds portfolio, which means that adding sukuk to this portfolio increased VaR by more than 10% (Table 8) The principal findings of this empirical research are the following: 1. Sukuk are different to conventional bonds according to their price behaviour although international issues of sukuk are similar to conventional bonds when it comes to such features as issuance, redemption procedures, coupon payments, and default clauses.

2. Inclusion of sukuk in a bond portfolio minimises the risk compared to a portfolio consist of bonds only.

3. The correlation of sukuk returns with returns of conventional bonds is much smaller than the correlations of returns on conventional bonds with each other. Therefore if bonds are not perfectly correlated with sukuk in the portfolio, VaR is expected to be lower by the definition of correlation.

4. Possible gains from diversification should be evaluated against the lower return and liquidity risk of sukuk. Most of the time, possibly because of the segmented market structure and modern portfolio theory of risk versus returns, sukuk offer lower returns compared to conventional bonds.

20 | I sl a mi c Fi n a n ce R e v i e w

ISFIRE Insight

“2014: A Year of Possibilities for Sukuk?”

To conclude this first ISFIRE Insight, Mr Neil Miller, Global Head of Islamic Finance at Linklaters, sets out his expectations for the global sukuk sector in the coming year. As a veteran with nearly 20 years experience in the industry, and of structuring sukuk, Miller affords us an unparalleled insight into the state of the industry and gives us his opinion on how to build sukuk’s momentum particularly with relation to government finances.

As 2013 ended, the sukuk market was bubbling in anticipation. The final outturn for the year may not have matched the absolute volume of sukuk issuance during the preceding calendar year (2012 was itself a record breaking year) but there was nevertheless a sense of palpable excitement in the air. And whilst 2013 may also be the year when the sukuk industry can finally claim to have come of age – we shall discuss some of the developments that give us cause to say this – the sector still remains sub-scale.

So the key challenge of 2014 will be how to build upon the momentum of 2013 and propel the sukuk market towards sustainable volumes of issuance in more of its key markets.

Liquidity evolves Available investor liquidity seems likely to remain a theme in 2014, particularly in the Gulf Cooperation Council (GCC) region.

Barring extraneous events we can also expect sukuk pricing to remain competitive with conventional bonds, with issuers often being able to price sukuk at tighter margins to a comparable conventional bond issue.

After much delay the International Islamic Liquidity Management Corporation (IILM) finally conducted a successful auction in 22 | I sl a mi c Fi n a n ce R e v i e w

August. The IILM issue was designed to provide a short term instrument on a cross border basis that Islamic financial institutions can utilise to assist their liquidity management.

In effect, the first auction proved the concept of the scheme, but the challenge will be to ensure a stream of future issues in which all of the central bank member state shareholders participate. These instruments do not need to be tradable themselves but they must be issued regularly and consecutively if they are to

provide the support envisaged in their design to the wider Islamic financial services industry.

This article was being prepared as news of a second issue was awaited.

Governments ho!

Ignoring for a moment the IILM approach, one of the continuing challenges in the sukuk space remains the lack of the right sort of ongoing unilateral issuance by governments in the Muslim or Muslim-majority world. The

Global Aggregate Sukuk Issues (1996 - Q3 2013) Issues 800 700 600 500 400 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Q3 2013 Source : Thomson Reuters Zawya Sukuk Perceptions and Forecast Study 2014

February 2014 Issue

reasons are perhaps threefold: at one end of the spectrum there are governments running budget surpluses who do not need to borrow; at the other end there are governments that simply cannot obtain credit ratings to support issuance. However, a further problem is the technical challenge that nobody has yet satisfactorily solved or implemented: how can governments raise Shari’a compliant general purposes funding on a cost effective basis, where assets are constrained?

The recently developed methods increasingly being deployed by financial institutions (who often face a similar challenge) and corporations take many different forms and demonstrate the increasing maturity of the industry suggested in the opening remarks. In the financial institutions sector, 2013 witnessed the continued development of various types of cashflow and/or hybrid sukuk together with perpetual issuances that also qualify for Basel III purposes as Tier One capital. In the corporate sector, the appearance of ‘asset-lite’ sukuk based on outputs and developing the ‘airtime’ technology of the telecoms sector saw Emirates issue sukuk based on a measurement of route capacity known as ATKMs. We have also witnessed the development of corporate hybrid deal structures. At the moment these methods may not seem capable of readily translating into the public sector, but this is a subject to which we shall return shortly.

Will 2014 be a year of demonstration?

If the governments of countries such as the United Kingdom, Hong Kong, South Africa, Luxembourg and Ireland can deliver on intimations that sukuk will be forthcoming, then 2014 could be the year of catalytic change for the sukuk industry. The front runner must now be the United Kingdom in light of the powerful statement made by the British Prime Minister on 29th October 2013 that the Treasury was considering the technical challenge of issuing a £200 million sukuk the following year. In a parallel development, The Grand Duchy of Luxembourg has recently promulgated legislation designed to unblock a legal hurdle to its own sukuk issuance so “the race is on” (as Baroness Warsi remarked when speaking at the World Islamic Economic Forum (WIEF) in London in October) to issue Europe’s first genuine sovereign sukuk.

important demonstration that is no doubt also focused on giving the United Kingdom’s various Islamic financial institutions the sort of support that they require to perform their Basel III obligations. Already, the announcement has triggered a resurgence of interest in Islamic finance in the United Kingdom with several foreign banks now exploring the possibilities of opening a branch or representative office in the City of London.

In 2008, the government of the United Kingdom at that time was contemplating a £2 billion T-bill style of issuance with the ability to issue in tranches and on a multiple basis. In 2014, this has been scaled down to a slightly less dramatic but nonetheless

There is a certain irony that if any or all of these states were to issue sukuk, it would be government(s) from secular countries demonstrating the potential for these instruments. In the Muslim majority world, there are still surprisingly few regular or repeat

Baroness Sayeeda Warsi issuers (with only Bahrain, Dubai, Indonesia, Malaysia and Qatar really falling into that category). Notwithstanding the predicted huge infrastructure demands across the region, in the wealthier Gulf states budget surpluses prevail against the need to raise funds which, even in sukuk form, will likely be more expensive than utilising their own resources. As 2014 commences, Qatar has already announced it does not anticipate accessing the capital markets during the year. In other parts of the MENA region the political, legal and regulatory frameworks and the rating environment all conspire to make much desired sovereign issuances far harder to materialise than many perhaps first thought would be the case following the events of the w w w. i s l a m i c f i n a n c e r e v i e w. c o | 23

ISFIRE Insight Arab Spring. Nevertheless work is ongoing to try and remove hurdles and prepare the ground for eventual sukuk issuance in several countries.

An alignment of interests The prospect of governmental bodies, financial services and securities regulators, together with exchanges and standard setters improving their co-operation in matters of Islamic financial product standards and recognition would offer an interesting prospect for market participants along a UK, UAE and Malaysian axis. Formative sukuk issues would be an important initiator of greater collaboration, as it would benefit every market participant to have mutual recognition in the markets in which they operate. Malaysia has long supported the WIEF which visited a non-Muslim state for the first time in London last year. In 2013, Dubai hosted the Global Islamic Economic Summit to demonstrate its support for, and intention to become, the centre of the Islamic economy. The hosting of the next WIEF event in Dubai during the latter part of the coming year should further drive efforts along this axis and will make 2014 a very encouraging year if genuine collaboration starts to materialise.

The asset challenge faced by sovereign issuers After a year of successful evolution and progress towards creating instruments that can serve multiple purposes in the financial institution and corporate sectors, what needs to be done to develop the industry in the third major segment: governmental or sovereign issuance?

The challenges of sovereign sukuk issuance revolve around the existing approach taken towards internal funding models, the allocation of public funds and the availability of qualifying assets. The inability (or in some cases an unwillingness) on the part of government to be constrained regarding the ultimate use of proceeds means that an asset-based approach is virtually the only method available in the current structuring environment. Because governments generally spend funds from an unallocated treasury pool, an approach that might require the ultimate use of the funds to drive the repayment will often not be feasible.

In principle, the concept of sale and leaseback is a well developed method of fund raising that Shari’a scholars approve. The first use of the sukuk proceeds is to acquire a Shari’a compliant asset so a direct nexus is established between the source of repayment and the funds invested by the sukuk holder. The challenge for many governments becomes the 24 | I sl a mi c Fi n a n ce R e v i e w

identification of suitable, unencumbered assets that can be used to support a sukuk issued out of such a structure.

A greater challenge but one that might theoretically be easier to solve in the emerging economies of many MENA region and OIC countries, is finding a reliable method whereby governments can issue paper without being constrained by the shortage of assets or hampered by existing administrative models.

The developments in Islamic techniques we have seen in 2013 in the financial and the corporate sectors suggest that the financing part of the equation can evolve to address certain types of activity for which government is traditionally responsible. Thus financing structures that recognise the economic value inherent within certain types of concession or licensing arrangements, or that are structured around defined outputs or deliverables, should enable Islamic financial institutions and scholars to develop products better suited to governmental purposes.

If this approach to fundraising is to grow at a governmental level, it will be necessary for governments to re-organise their approach to public spending and the redistribution of governmental income whether in the form of tax revenues or commercial charges for services delivered. Shari’a compliant funding structures need to be developed that encourage Islamic investors to invest in the provision of infrastructure and services that are often the primary responsibility of government. Although the MENA region has started to witness some Shari’a compliant examples of projects structured along the lines of public private partnerships (PPP), there is further work to be done to create the different types of procurement, asset management and funding structures necessary to support public fundraising better suited to Islamic considerations. For example, the Ottoman era concept of Esham, or the ancient system of public finance based on Qabalah, could be revisited. Understanding these methods and possibly adapting and combining them with more recent forms of revenue bonds, municipal bonds or moral obligation bonds, offers a potentially fruitful area for deeper consideration by governments in Muslim states. The way in which such instruments might be structured, and the cash flows they might generate, would likely require a different type of investor to the classical buyer of fixed income sukuk and conventional bonds. However, some commentators on the perpetual character of the ADIB Tier One sukuk have already suggested that its oversubscription may be indicative of a willingness

amongst a broader class of investor to purchase alternative forms of Shari’a compliant instruments.

Parallel developments If secular countries start to launch sovereign sukuk during 2014, and if further research can commence regarding the development of alternative mechanisms whereby governments in the Muslim world can start to issue sukuk that align with their public spending and revenue plans, 2014 would really start to see the emergence of a coherent framework for the sustainable future of the Islamic capital markets. An attempt to create, or develop, new forms of primary instrument, perhaps requiring (as suggested) a re-evaluation within government of the approach to spending and investment, ought to be feasible in emerging countries that may not necessarily be wedded to existing methods of public spending and management. At a time when both the social fabric and the physical infrastructure of so many countries in the MENA region and OIC countries requires development (or reconstruction), it should be incumbent upon Islamic financiers that they develop the alternative methodologies implicit in finding Shari’a compliant solutions to these demands, and educate the existing traditional investor base so that it becomes familiar with a broader universe of sukuk products.

Interview

Ramlie Kamsari Chief Executive Officer CIMB-Principal Islamic Asset Management

Ramlie Kamsari, Chief Executive Officer – CIMB Principal Islamic Asset Management proved to be a fascinating conversationalist. He drew me in and revealed the unquestionable ambition of the man and the global vision of the company he represents. This is all revealed in the following lengthy but engaging interview.

I was not overwhelmed. Shaking the hands of the young CEO of CIMB-Principal Islamic Asset Management (“CIMB-Principal Islamic”), Ramlie Kamsari, I stood with a respectful smile followed by banal greetings and gapfilling banter common to most introductory meetings. He came with a fitted suit, fresh shaven with hair neatly combed in place. With an engaging smile and a rather quiescent voice, I could hardly associate him with the gruff, aggressive, cantankerous image that I had created earlier of a win-at-all-costs banker.

Perfectly ironed shirt and suit, and a tie knotted close to the neck (there was no gap between collar and bow) with an elaborate, though not bedazzling watch, and shined shoes, he was undeniably a man particular (but not overzealous) about his appearance. He was also unassuming and there were no airs and graces about him. He shook my hands firmly, and as he walked around, he appeared as a man without a care in the world.

“I was shy and quiet as a child,” Ramlie reminisced, “but two things changed me: military and marriage.” Admittedly, I was 26 | I sl a mi c Fi n a n ce R e v i e w

surprised: this warm and engaging man was in the military! He appeared reserved at first, but as the interview progressed, it became increasingly evident that beneath his serene countenance lies a passionate ambition. This was a man that had searched for success with determination. Ramlie has always known to adapt according to the needs of the situation.

He was not an obdurate man, set in his ways, inclined to believing that his way was the only way. Every experience held opportunities for education in three different ways: technically, practically and spiritually. And Ramlie likes to learn and to progress.

developed nation, organized and functioning under a strong rule of law.

Ramlie was born in Singapore, the tiny nation island that sits at the mouth of Malaysia.

During the British colonial period, it became an important trading post and to this day, Singapore represents a thoroughfare for traded goods. After gaining independence in 1965 from Malaysia, the steely Lee Kuan Yew oversaw the development of Singapore, creating the infrastructure for the island to thrive on the international scene. In just under 30 years, Singapore is today recognized as a

The global ambitions of Singapore are distinctively reflected in Ramlie. Prior to joining CIMB Group in 2004, he worked at Societe Generale, a French financial institution, Refco Group, an American financial services company and the Daiwa Group, a Japanese financial conglomerate. It is a truism to state these experiences developed his technical skills particularly in futures and options trading, but the diverse experience gave him exposure to different management styles as well as cultures

Singapore is also known for its cosmopolitan lifestyle. Global financial institutions, from banks to law firms have set up businesses in Singapore to cater to the ASEAN community.

Singapore is a leading provider of financial services in the region and regarded as a wealth management hub. Indeed, it competes with London, Hong Kong and New York as a major financial centre, which is quite impressive for a country with little natural resources and a small population.

February 2014 Issue

which would influence his own approach to management. However, the experience which had the greatest impact on Ramlie’s own perspective on life and career was his first job, following the national service in the Singapore Armed Forces. In 1994, Ramlie joined the Singapore-unit of Barings Bank, one year before the unceremonious collapse of one of the oldest British banks in the world.

“Everyone liked Nick, sometimes to a fault.

He was friendly, and took time to talk to us.

He was also driven and hard working.” Ramlie could have hardly seen that a few months later, Nick Leeson would be in the centre of a storm that consumed Barings. The young neophyte, Ramlie, could only look aghast as not only did he see his employer collapse, he was now associated with what was deemed as a “pariah” organization. “I was at the epicenter of the Barings collapse and being associated with Barings after the debacle had repercussions on one’s career. The authorities expectedly took a hard line on the fiasco. So I was deeply concerned about what it would mean for my future. Fortunately, after a brief, unwarranted hiatus, I was able to get back into the industry and join Daiwa, which was setting up a commodities trading unit at the time.”

Q1: The Islamic finance derivatives market remains small and controversial. Does the industry need Islamic finance derivatives?

What benefits would it give to the industry?

Certainly one can point to abuse in relation to derivative usage in the conventional markets, especially when they are used for pure speculation. That use of derivatives is clearly “gharar” and should be prohibited in Islamic finance.

However, derivatives can be used to reduce risk, and to hedge against unwanted exposure to certain market fluctuations.

Used this way we can see uses for Shariah compliant derivatives not for speculation, but rather to reduce risk (volatility) and to increase certainty in Islamic investment portfolios.

As the institutional investor base in sukuk continues to grow, we now have clients in various jurisdictions with varying currencies.

Given the global volatility in FX rates, we are seeing an increased interest in using Shariah-compliant currency futures to minimize the risk, or uncertainty, caused by currency movements.

“I learned quickly from Barings’ collapse and I honestly felt that if I had stayed at Barings, I would have been strait-jacketed in some ways. The whole debacle drove me to push for success, but not at all costs. I became more aware of the importance of integrity and being guided by ethical standards. What happened was a definite life lesson to me”.

Speaking to Ramlie, it does not feel that military and marriage are the only avenues by which he has learned to become more outspoken. Each experience provided a life lesson and built his character, and in this evolution, his career blossomed. When the formidable Datuk Noripah Kamso, former CEO of CIMB-Principal Islamic, met Ramlie, then Head of Global Services of the Societe Generale’s derivatives trading division in Singapore, she was impressed by his knowledge, fervour and demeanour. So much so that she invited Ramlie to be Head of Institutional Sales of CIMB Futures, reporting directly to her, who was then the CEO of CIMB Futures. On his first day of reporting for work, Datuk Noripah announced that with her move to another part of CIMB Group, Ramlie would be heading CIMB Futures as the new CEO. Moving to Malaysia appears strange given Singapore’s global presence and Ramlie’s global perspective and ambition. His career history is a testament to this. “I was brought in to release CIMB Futures from its time capsule and to build the derivatives broking platform to international standards. The business was too domestic focused. In Singapore, I was dealing with over 3,000 listed-derivatives products; in Kuala Lumpur, I was only effectively able to offer three products: the KLCI (KL Composite

Index) Futures, the KLIBOR (KL Inter-bank Offered Rate) Futures and the CPO (Crude Palm Oil) Futures.”

Q2: Which equity sectors are showing the best returns in the Malaysian market and among your portfolios? Conversely, which sectors are showing the worst?

Oil & Gas and Utilities, mainly Tenaga National Berhad (TNB), has been the best contribution to our Malaysian portfolios. Specifically for TNB, they have received approval from the Cabinet for a 15% tariff hike effective 1 Jan 2014. The base tariff hike and adjustments for liquefied natural gas (LNG) are earnings positive for TNB. In the broader oil & gas space, robust contract flow is slated to continue with new developments like marginal fields, enhanced oil recovery projects and new gas developments. We also expect significant job creation to emerge for downstream oil & gas from Petronas’ Refinery And Petrochemicals Integrated Development (RAPID) project.

On the other hand, Consumer Services and Consumer Goods have been a negative drag on portfolio returns. In the 2014 Malaysian Budget, the Government had announced the implementation of the Goods and Services Tax (GST) in 2015 and this coupled with creeping inflationary pressures has been detrimental to the consumer.

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Interview

Mr Ramlie Kamsari’s Management Style Open Door Policy: “Employees can speak to me on any matters or concerns. I am approachable and welcome any feedback, suggestions and ideas. I strongly believe in the value of having the diversity of ideas from across all levels in the organization.”

Empathy: “I am blessed to be where I am today. I started my career from the rank and file and I can therefore empathize with the team when faced with difficult challenges. I try to put myself in their position and give them motivational pep talks to encourage them to push further.

My mentor once said that there are many good leaders but a leader that can also show empathy and compassion stands apart.”

Solidarity: “A team is only as strong as its weakest link. I am glad there is strong camaraderie within the team. The team dynamics are good and we seemed to complement our respective strengths to form one solid unit. I see my role as therefore to enable the team better so that each member can realize their fullest potential.”

Interest and support: “Often times, bosses can be too detached and isolated. Employees want them to show and take interests in what they do. I engage my team actively in any given day, ranging from serious business matters to innocuous small talks. It gives me a good pulse of the team and I can support them better knowing intimately the challenges that they face.”

Sourcing opinions: “I am very analytical and meticulous by character. When making decisions, I like to engage my team for opinions and exhaust all views where possible. I pick their brains and try to involve them in the decision-making process. I will ultimately decide of course, but I sincerely value the diversity of views from the different people in the team. I feel this also gives them collective ownership to the decisions made.”

Humility: “Bosses are not always right. A solid team is like an orchestra and I am simply the conductor. I am not an expert of every aspects of the business; that is why I have leaders and specialists to aid and support me. I empower them and they exercise the autonomy to the best interests of the organization. I might give my viewpoints at times, but I trust and have confidence in their ability and judgement.”

Communal Spirit: “At a recent team-building retreat, I thanked the spouses and partners of my team. I made the effort to know their names (and the children’s names and their birthdays) and wanted to give recognition for their support and understanding. This is not prescriptive for me. I do it as a matter of course and because I take a genuine interest in the well-being of my team. My team knows that I care for them, and I feel this makes them want to work harder and go the extra mile in pursuit of our shared goals.”

Hard work: “Passion and discipline drives me forward. I clock on average 12 hours daily for a typical work day (and sometimes the odd weekend when I travel for business). I am a ‘handson CEO’ and I am fortunate to have a team that shares my passion and strong work ethics. That aside, I also feel it is extremely important to fulfill the amanah or responsibility that has been entrusted to me to the best of my ability.”

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CIMB Group is a network of several business entities creating a regional financial house. Its focus has been on Malaysia, but in the last two decades, it has looked beyond the peninsula.

To grow, it has aggressively broadened its services and offerings across several markets. Ramlie was a perfect hire to help the organization achieve global expansion. Since joining in 2004, he has been tasked to build four different businesses: Derivatives Broking, (CIMB Futures, 2004 - 2006), Islamic Equity & Derivatives (CIMB Islamic Bank, 2006 - 2008), Insurance, Takaful and Risk Advisory (CIMB Insurance Brokers, 2008 - 2012), and now Global Islamic Asset Management (CIMBPrincipal Islamic Asset Management, 2012 - present). “I am considered as a start-up and turnaround expert, and have built a solid track record of building businesses. I really have to thank CIMB Group for the opportunity and confidence. Each time, it felt like a baptism of fire, but I relished the challenge of learning new areas and bringing the businesses to the next levels.”

This thinking served him well when he joined CIMB Islamic Bank in 2006. Although he had a low knowledge of Islamic banking services at the time, he saw the global potential of the industry. In the same year, the Malaysia International Islamic Financial Centre was set up to promote and strengthen the Islamic finance market space. There was strong government support especially with the issuance of the Ninth Malaysia Plan, covering the period of 2006 to 2010, which sought to position Malaysia as a global hub for Islamic capital market products and services, and in particular, as a centre for origination, distribution, trading, fund, and wealth management. Ramlie saw a global potential, but he had to learn about Islamic finance quickly given the speed by which the industry was progressing.

Q3. We would like you to play clairvoyant now. What do you think the Islamic finance landscape will look like in 10 years time? Do you think it can, in any country, outgrow the conventional industry?

We expect there to be tremendous growth in Islamic finance over the next 10 years.

Not to say Islamic finance is limited to Muslim investors, but if you do just look at the demographics of Muslims globally, they are clearly supportive of significant growth in Islamic finance. This is based both on population growth as well as increases in per capita income in various Islamic

February 2014 Issue

countries and regions.

For example, the region of the world with the largest Muslim population is right here in Asia-Pacific. Nearly a billion of the world’s 1.9 billion Muslims resides in the Asia-Pacific, in Emerging Markets (EM) such as Malaysia and Indonesia, where per capita income has been climbing for a number of years. So, it is not just the size and growth of the Muslim population, it is also the growing wealth of that population that is creating a massive demand for Islamic finance products. The reality is the global Islamic fund industry with asset under management (AUM) of around USD 60 billion, is still in its infancy compared to the conventional fund industry which has AUM of nearly USD 22 trillion. Given the mature stage of the global conventional financial markets, while Islamic finance may not outgrow conventional absolutely, we believe the rate of growth will significantly outpace the conventional industry in multiple regions over the next decade.

CIMB Islamic Bank had started in 2003 as a small, boutique Islamic investment bank.

After two years, it sought to expand its Islamic investment banking capabilities. In 2005, it merged with Commerce Tijari Bank, and in 2006, it acquired the Islamic banking business of Southern Bank. Ramlie was brought in to establish and build capacity for the Islamic equity and derivatives markets. “I worked actively on a task force with Securities Commission and Bursa Malaysia to formulate and implement an Islamic stock-broking framework. There were some discussions about derivatives, but the primary focus was mainly on equity-based products. At the time, to increase the knowledge of Islamic finance, Bursa Malaysia and several local institutions, including CIMB Group, had introduced and implemented various investor education and awareness programmes to educate the retail investors in particular.”

However, after two successful years, CIMB Group offered Ramlie another role. CIMB Group had acquired Affin Insurance Brokers to facilitate its entry into the insurance, takaful and risk advisory business. Ramlie was appointed to the helm as CEO of the rebranded entity, CIMB Insurance Brokers. He worked on the acquisition and the subsequent integration of the new business into the CIMB Group. “Again, I had to challenge and push myself as I knew little to nothing about insurance. I had to learn things fast, as well as build a solid team to position the company as the premier insurance and risk advisers to

major Malaysian institutions and corporates. I brought many new people ranging from risks and claims specialists from market leaders such as Marsh and Aon, but their entry brought in a different work culture compared to Affin, for instance. At some point, the different teams evidently went into a collision course, and being the flag-bearer for CIMB Group, I had to intervene and direct the team to adopt one uniform ‘CIMB standards’ for the way forward.”

Part of the problem confronting Ramlie was the typical American work culture that placed a pre-eminent position to earning profits for short-term gains. Sometimes this would occasion transactions which were suspect at best. For Ramlie, success did not mean entertaining transactions which, while lucrative, might push the boundaries of acceptability and ethical standards to dubious level. “We walked away from a number of transactions. There is inherent pressure within the industry to partake in such practices in order to compete, but I was brought in to ensure we worked on deals that are in tacit compliance to local regulations and the robust ‘CIMB standards. Indeed, I did not want CIMB Group to fall into disrepute. That was the vision I had to sell to my team from the start.”

Post-acquisition, the insurance outfit was doing rather well, registering record profits every year since he took over as CEO. However, the focus was clearly domestic. Ramlie was yearning to branch out beyond the shores of the Malaysian peninsula. And so it came to pass that at the back end of 2011, CIMB Group yet again offered him a new challenge vide CIMB-Principal Islamic, the global Islamic asset management platform that offers Islamic investment solutions to global institutional investors and sub-advisory services to collective investment trust funds. CIMBPrincipal Islamic is a joint venture between CIMB Group and Principal Global Investors based in the US, and after a rigorous selection process by the two shareholders, Ramlie passed with flying colors and was appointed as the Deputy CEO and Head of Global Sales & Marketing in January 2012.

Q4.What are your predictions for the sukuk and equity market in Malaysia and the Far East region over the coming year?

MYR and Regional Sukuk In Malaysia we saw a sizable increase in yields for Malaysian government securities (MGS), and although corporate spreads tightened some, overall yield for corporates rose in 2013 as well. For 2014, the market is

expecting spread widening for corporates, and either somewhat of a stabilization or moderate increase in MGS yields. Potential issuers share those expectations and have been testing the market for issuing, but institutional investors are staying sidelined.

Because of this, for the 1H 2014, we expect issuance to be slow. However, once sentiment has improved and the upward move in yields has stabilized, we expect the pipeline to pick up significantly in 2H 2014, driven by significant capital needs for capital expenditure and infrastructure and debt refinancing from both the private and public sectors.

USD Global Sukuk Global rates have risen aggressively following the US Fed’s announcement in May 2013 of its intention to start winding down QE3. As a global fixed income product, USD sukuk had a challenging year in 2013 where yields were low and spreads were quite thin in the early part of the year and then widened considerably with a commensurate negative effect on prices.

At this point, there has been a re-pricing, and significant spread has returned to USD global sukuk, so investors looking for yield are allocating portfolio capital to this asset class. We see that being a continuing theme over the next twelve months.

We also expect a steady stream of issuance from our Malaysian and Gulf Cooperation Council (GCC) sukuk markets. Issuance will be related to infrastructure needs of the growing economies and issuers will be looking to tap the liquidity that is available in the global USD sukuk capital market.

Equity As for the equity markets in Malaysia and the region, we expect continued volatility as the market adjusts to the expectation of a further wind down of the QE3. This “tapering” which will ultimately be the discontinuation of QE3 will continue to put pressure on Emerging Market equities.

However, at the same time, we see signs of synchronized global growth. Certainly we have seen growth pick up in the United States, and in the United Kingdom. Certain European countries (EU) countries are growing, and in total we expect the EU to at least not be a negative contributor to global growth in 2014 which is an improvement.

China has stabilized its growth for now as well. So, while there is downward pressure from the taper which is causing a reversal w w w. i s l a m i c f i n a n c e r e v i e w. c o | 29

Interview

of EM fund flows, we see global growth benefitting Malaysia and other export countries in Asia. In Malaysia, where exports account for over 80% of GDP, a return to global growth is a great lift, and we saw that in the third quarter of 2013 in both the outperformance of exports as well as the improvement in the current account surplus. Compared to three months ago, we see the momentum in downgrades is slowing as well, and the long awaited earnings upgrade may finally happen sometime this year. Right now we maintain a December 2014 target of 1920 based on 15 x 2015 earnings.

When Ramlie joined CIMB-Principal Islamic, it was a relatively small team that had in the four years since incorporation in 2008 raised USD 1 billion. In the year that followed, CIMB-Principal Islamic raised another USD 1 billion, a quite outstanding feat amidst a challenging operating environment in 2013.

Ramlie introduced a clear and robust structure within CIMB-Principal Islamic by bringing in more investment professionals, including portfolio managers and credit analysts for future capacity building. If his predecessor Datuk Noripah had built industry recognition, creating and strengthening relationships with industry partners, regulators and government bodies; Ramlie shifted focus towards strengthening client engagement and relationship management, developing a global outreach through effective partnerships; and also institutionalizing work processes and governances.

Client focus did not only mean generating good returns. “Clients want sustainable results over a time horizon. They also demand full 30 | I sl a mi c Fi n a n ce R e v i e w

adherence to investment guidelines and have a zero tolerance policy on non-compliance issues. They therefore expect and want certainty and confidence that the fund managers have the capabilities and the basic tools to deliver on those expectations. We thus ensured that the team was equipped with the requisite expertise and skill-sets, and in particular, the portfolio managers were enabled with the right analytical tools needed to spot the right investments and deliver superior returns. Additionally for us, maintaining best-in-class standards and international best practices across the business, covering legal, compliance, risk management and Shariah governance for example, were clearly imperative.”

Coupled with client-centric activities, CIMBPrincipal Islamic stepped up efforts on the international front. Two ground-breaking transactions were the Al-Hilal Global Sukuk Fund (CIMB-Principal Islamic acted as Investment Advisor) and three Undertakings for Collective Investment in Transferable Securities (UCITS) Equity funds launched in March 2012. “These funds gave us a global access point as well as a shop-window to showcase our capability internationally. For the UCITS funds domiciled in Dublin, Ireland, investment research organizations such as Morningstar and Lipper, can provide the funds better visibility through tracking of the fund’s performance over a time period. If the track record is good, institutions will then be attracted to invest in the funds directly or through discretionary mandates, having seen CIMB-Principal Islamic’s capability from the fund’s performance.”

Q.5 Where are most of your clients based? What is the ratio of individual and institutional clients? Also, what is the growth strategy?

Being Malaysia based, it is almost given that a large portion of our client is based in Malaysia. However we have seen a steady and growing list of clients originating from the GCC. Given that these two geographic locations consist vast Muslim populations, it makes business sense to build a strong foothold in these “low hanging fruits” whilst concurrently exploring the west and making ourselves known to them.

Being established in 2008 under the Malaysian Islamic Financial Centre, it has always been our strategy to focus on

the Institutional space. The UCITS which is predominantly a retail instrument is a strategic initiative to provide visibility for manager searches globally. We partner with institutions globally to distribute the funds, and as such from our perspective, remains as institutionally focused albeit from a different perspective. The UCITS funds remain an important long term strategy for us to expand beyond our familiar markets.

Building interest in the UCIT Islamic funds has been challenging at best. CIMB-Principal Islamic had undertaken to build reach and distribution in a number of different ways.

Target investors included global institutions, large corporates, private banks, as well as family offices. At the time of the launch of the funds, Bahrain was identified as one of the key markets, but with the outbreak of political instability, demand has been marginal there.

Focus has now been shifted towards other burgeoning markets in the GCC such as United Arab Emirates and Saudi Arabia.

Another country of interest was Germany.

“We spent 18 months trying to gain traction in the German Turkish community. It is a unique community, comprising of six million Muslims. The young professionals are growing in strength. They have a growing household income and high saving rates, and are looking for Shariah-compliant investment homes. We engaged several indigenous Turkish banks in Germany for the retail distribution and also collaborated with marketing agents to interact with the Muslim associations, community centers and local mosques. Unfortunately, sales traction has been slow. Hence, we have scaled down our activities for Germany for the time being.”

Q6. Please explain the UCITS funds launched in 2012 “The launch was subsequent to the establishment of CIMB-Principal Islamic Asset Management (Ireland) Plc, the first Malaysian-based international Islamic funds platform domiciled in Dublin, Ireland.

In this platform, three new Islamic UCITS Equity Funds were registered – Islamic Global Emerging Markets Equity Funds, Islamic Asia Pacific ex-Japan Equity Funds and Islamic ASEAN Equity Funds. These Islamic UCITS Funds will be registered and offered to investors in seven jurisdictions – the United Kingdom, Switzerland, Saudi Arabia, Bahrain, Qatar and Singapore.

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These Islamic UCITS Equity Funds were identified and offered to international investors based on market research which revealed the growing investor demand for these investment strategies to meet their investment appetite in tapping the economic growth stories of these regions.

These strategies are also currently not widely available on a UCITS fund platform.

CIMB-Principal Islamic is the investment manager of these Dublin-based UCITS. In essence, an UCITS-compliant fund is regarded as a “European Passport” whereby if they are authorized in one EU member state, they can be sold in any other EU member state without the need for additional authorization. UCITS are highly regulated and as such are well regarded globally, with robust risk management procedures and a strong emphasis on investor protection. As a result, UCITS standards are recognized beyond the EU. The idea of establishing a global fund platform is conceived as an initiative to overcome the challenge to bring international and institutional monies into Malaysia for its transformation into an international hub for Islamic finance.

With this new Islamic fund range in Ireland, institutional and retail investors globally will be able to see CIMB-Principal Islamic’s asset management track record. If the funds do well, not only will this attract investment into those funds, but institutional investors may also appoint CIMB-Principal Islamic to manage their discretionary mandates.

Having the funds registered in Ireland demonstrates that the Malaysian asset management regulatory framework is of world class standards. To have registered the funds as UCITS compliant means that the Central Bank of Ireland is convinced that the home regulator for CIMB-Principal Islamic, the Securities Commission is on par with that in Europe.

The Company also collaborates with multi-national Shariah advisors from Malaysia, Saudi Arabia, Bahrain and Canada. It employs Global Investment Performance Standards (GIPs) to ensure fair representation and full disclosure of investment performance results.”

In creating a global outreach, Ramlie has to travel extensively - establishing relationships with regulators, institutions and other industry players; and speaking in conferences and seminars to inculcate better awareness of Islamic asset management; in different parts of

the world. In doing so, CIMB-Principal Islamic acts as a pseudo ambassador for the Malaysian Islamic financial services industry. If CIMBPrincipal Islamic is successful then there is a trickle down for the domestic industry in terms of profile and global respect. If Malaysia tended to be more insular previously, its success and promotion of Islamic finance are opening international doors. “Our maxim is that we can only be successful if others are also successful.

Making the industry stronger takes so many people working together. For instance, we have a good relationship with the Malaysia International Islamic Financial Centre (MIFC), which benefits us and them, and also the wider industry.”

Ramlie accepts that the success of CIMBPrincipal Islamic cannot be narrowed down solely to the team. CIMB-Principal Islamic works closely with several partners within the two shareholders, particularly CIMB-Principal and Principal Global Investors. “We are a lean but mean team, and we are trying to conquer the world. We therefore have to rely on our partners who have the specific expertise and requisite experience to give us the support and assistance needed, especially in understanding the vagaries and dynamics of the various markets in Europe, Asia and the GCC. Thus, working in close tandem with these partners, and having shared goals and objectives, gives us the competitive edge to capitalize on the opportunities across the different markets.”

“Our business model leverages on the shared services of our shareholders globally. With existing resources across CIMB Group and Principal Financial Group, it does not make sense to duplicate certain functions in the business, and thereby increase our overhead costs unnecessarily. We will continue to actively tap on the unique expertise and collective strengths of the shareholders to be ahead of the curve. Also, with continued support and commitment from the shareholders in this growing and exciting space, we are confident of providing a complete Islamic solution while consistently delivering value to our clients.”

Ramlie hopes that 2014 will be the year where CIMB-Principal Islamic fortifies its stature as a market leader in Islamic asset management. In particular, he strives to further strengthen its existing capabilities in Islamic Equity and Global Sukuk, and potentially add a new capability in Islamic Global REITS. He hopes to raise another USD 1 billion in assets globally, break into new markets and continue to build global scale and outreach. “I have set a challenge to my team to become the ‘Islamic Pimco’ for Global Sukuk.

(Pimco, a unit of Allianz Asset Management, is the fund manager of the world’s largest Fixed

Income fund). For that, our focus should be building capacity, establishing a GCC presence, investing in high quality and well-performing assets and meeting each client’s specific needs and unique requirements.”

I am intrigued at the last point. If returns are good, then a company would have met the client’s needs? “Investment performance is always a key determinant, but every fund manager is expected to deliver that. What is then the differentiator? It has to be the human element and the personal touch. We take time to engage the client, meeting them regularly, organizing activities such as iftar gatherings to get to know them better outside the business setting. I have imbued in my team the importance of strengthening relationships with our clients across all levels. It builds trusts and generates more confidence, paving the way towards a stronger partnership between us and the clients. And that’s the way it should be, that we are both partners working towards a common objective.”

Building human relationships are important for Ramlie both in the team and with the clients. This gives CIMB-Principal Islamic a more personable quality. It has been 20 years since Ramlie joined Barings, and he has come a long way. His experiences working across different countries and cultures, and dealing with different people with unique skills and approaches have factored in his own ways of working. He is very much a people’s person as he enjoys their company and learning from their experiences too.

“CIMB-Principal Islamic is a keen supporter of the INCEIF internship programme. We have hosted many interns over time, and recently we had an intern from Saudi Arabia named Muhammad Asad. On his last day with us, he timidly approached my door to announce his departure. I invited him in for a chat and we ended up having quite an engaging session.

To me, inspiring interns such Asad does not take much, but the effort certainly goes a long way. I strongly believe sharing my own experiences with them can positively inspire them, push them forward and encourage them to give their best. They are, at the end of the day, potential new leaders and the next engine of growth for the industry. In my own little way, I hope I have given them the inspiration and confidence to meet challenges with the tenacity and grit of determination that I had.”

By the end of the interview, I was certainly not overwhelmed and was taken by his warm and down-to-earth demeanor. Ramlie does not want you to be intimidated by his presence.

Rather, he hopes that you will be inspired by his dedication, attitude and approach. I must say I certainly was. w w w. i s l a m i c f i n a n c e r e v i e w. c o | 31

Q7: Allow me to give you examples of three men: one is a retired high net worth individual, the second is a middle age doctor with a family and lastly is a teacher living the single life. If you could advise each individual about potential investment opportunities, what would your advice be?

The basic tenets of Managing Wealth & Retirement Planning remain, even if you are already retired. The availability of excess Disposable Income, or in one of the cases, Disposable Savings, is important in deciding an appropriate allocation. People always talk about how much gains you are looking at. I tend to look at how much loss can one tolerate instead. Can that person tolerate foregoing their lifestyle of the “rich & famous” to a “middle income” earner?

There’s no simple answer that fits all age demographics. It is unique to each individual. My advice is to consult your designated wealth advisor to develop a custom plan that suits your needs and financial goals in life.

That is in fact a challenge in Asia, primarily in the lower and middle income bracket.

They do not see the benefit of engaging a professionally qualified wealth advisor to discuss wealth and retirement planning and see it as a waste of money. Instead, it should be seen as an investment for their long term gain. Asians in general are punters and short term investors. Hence the stock market is their playground. Long term investments remain a challenge for them to accept. The people need to be educated of its importance and it requires the support of not only private companies but also the government to initiate and encourage this change of mindset.

32 | I sl a mi c Fi n a n ce R e v i e w

The key functions of FAA are to: • Ensure high quality assurance and accreditation practices in accordance with global standards and practices.

• Provide collaborations and affiliations for mutual and global recognition in quality learning.

• Promote and maintain the quality of human capital in the FSI. • Leverage on the expertise and experience of industry practitioners from global leading financial institutions to provide assessment, review and recommendations towards enhancing the quality of training and learning programmes.

The Giant Awakens - NASDAQ OMX I

ndex providers like S&P Dow Jones (or formerly known as S&P and Dow Jones), MSCI, Russell-Jadwa , and FTSE have played an instrumental and pioneering role in developing and promoting Islamic banking and finance globally. However, one late and a vital entrant to service this important industry is NASDAQ OMX, known throughout the world as the first electronic stock exchange, but for purposes of this article, one of the world’s largest indexers.

NASDAQ OMX entered the market with a bang by launching two Shari’a indices in 2010. These indices were jointly launched with Edbiz Consulting and are known as Edbiz-NASDAQ- 100 Sharia Index [N100SI] and Edbiz-NASDAQ Stockholm Benchmark Sharia Index [OMXSBSharia]. The Edbiz -NASDAQ Sharia Index Family has seven Sharia indices in total, based on The NASDAQ-100 [NDX] and OMX Stockholm Benchmark [OMXSB]. NDX and OMXSB are followed globally and hence bring an opportunity for customers interested

34 | I sl a mi c Fi n a n ce R e v i e w

in maintaining Islamic investment portfolios.

These portfolios offer the risk and return profile of the top 100 domestic and international stocks based on market capitalisation listed on The NASDAQ Stock Market, and the largest and most traded securities in Sweden. The indices were a result of the vision and drive of John Jacobs, Executive Vice President at NASDAQ OMX, and Robert Hughes, Vice President, who understood the timely importance of this niche market.

As of February 2014, NASDAQ OMX operates in 26 markets spanning 6 continents. The group owns three clearing houses and five central securities depositories thus making it the largest exchange company globally. NASDAQ OMX is also home to 3,600 companies listed on its exchanges, with total market capitalisation of more than US$ 7 trillion. NASDAQ OMX technology supports equities, options, fixed income, derivatives, commodities, futures and structured products. Most of the markets

February 2014 Issue

trade equities, while six of the markets trade options, derivatives, fixed income and commodities. From a global perspective, NASDAQ OMX trades 1 in 10 securities of the world and is also the largest liquidity house for US equities. The technology of NASDAQ OMX is trusted by 80 exchanges (market places) in 50 countries around the world (including growth in emerging and developed economies). NASDAQ OMX also takes pride in hosting and designing indexes, including benchmark families developed in accordance with changing market conditions. So far, NASDAQ OMX has more than 41,000 indexes that provide coverage of various asset classes, countries and industries. NASDAQ OMX helps banks and financial institutions including fund managers (including ETF providers) and private investors in influencing and tracking investment strategies. Further, it not only provides comprehensive insight into the global market but it differentiates itself by its process and competitive pricing as compared to other indexes.

What does NASDAQ offer and what makes it different?

Indexing – NASDAQ OMX is a full-service Index provider with diverse indexes covering all asset classes. The Global Indexes division is prepared with an index solution for any market. In addition, they provide independent, third-party custom index services and design solutions to financial organizations worldwide.

Their capabilities allow the client to set unique parameters based on regions, sectors, theme, taxes, regulatory constraints, calculation methods or specific investment strategies to create the exact index needed.

Listing – It is a premier listing exchange for approximately 3,600 industry-leading companies from more than 50 countries, representing all industry sectors and many of the world’s most well-known and innovative brands.

The NASDAQ’s Market Structure

COMPETITIVE Multiple market makers compete for price and trade executions

TRANSPARENT

ACCESSIBLE

Full price disclosure to investors

Trade execution measured in milliseconds

PROVEN TECHNOLOGY Opening/Closing cross process

unsurpassed speed and tested capacity to execute trades quickly and efficiently.

Who uses the indices and why?

NASDAQ’s client base spans the entire spectrum of the financial services industry including big investment banks, portfolio managers pursuing passive investment strategies, commercial banks, and insurance companies located in the Americas, Europe, and Asia. Further, they also license their indexes to asset managers and financial entities that distribute a variety of financial instruments that closely track their indexes with the purpose of achieving investment results that generally correspond to the performance of their indexes, such as ETFs, mutual funds, UITs, annuities and other portfolio-based products.

Index options, futures, and other derivatives based on NASDAQ OMX indexes are available to institutional and individual investors to be used for risk management.

Indices are a gauge of market health, be it reflective of the broader economy or a specific sector – such as technologies. Indexes allow institutional and individual investors to track day-to-day changes as well as long-term trends in the economy and the financial markets. They are used as benchmarks, a standard by which economic sectors and investment portfolios are measured. They bring clarity to market participants and help them with investment decision-making.

NASDAQ OMX’s index creation process is driven by demand and developments in the global economy. Objectivity is crucial to the creation of a robust index. The perspective of the investor remains the cornerstone to the formulation and an investor has to be certain the index is truly reflective of the general economy or segment. NASDAQ OMX adopts a methodology that looks at ways to measure segments or sectors of economic models in a fashion that is transparent and based on rules with an emphasis on investing, trading, and philosophy.

The never ending journey began….

NASDAQ began in 1971 as the National Association of Securities Dealers (NASD), which wanted to create a market for investors to buy and sell securities on a computerised and fast system. This meant moving away from a system that required manual work and was largely inefficient. Technology had advanced to a level where it could assist in closing the price gaps. National Association of Securities Dealers Automated Quotation (NASDAQ) went live on February 8, 1971, with quotes for 2500 over the counter (OTC) securities. NASDAQ takes pride in being the pioneer of this shift, and benefited

Trading – NASDAQ OMX is one of the largest ETF exchange based on volume. Deep liquidity and transparency are at the core of its trading venue.

Data Dissemination – NASDAQ OMX Global Data Products provide millions of traders and investors all over the world with strategic advantages, including superior speed, transparency, depth and flexibility of data management and delivery.

Superior Technology – NASDAQ is renowned for its high performance INET technology and has proven reliability with 99.99+% uptime. NASDAQ is known for its

w w w. i s l a m i c f i n a n c e r e v i e w. c o | 35

from the first mover advantage.

NASDAQ proudly associates itself with some well-known, well-established and well-led organisations of today. However this was not always the case. During the early periods these companies were new entrants to the market and were growth companies rather than established companies. NASDAQ gave an opportunity to such companies for the first time to raise capital, an opportunity that was not known to such companies prior to that.

These companies are still listed on NASDAQ exchange and include household names such as Microsoft, Apple, Cisco, and Intel. Further this can be regarded as part of NASDAQ’s Corporate Social Responsibility (CSR) as such companies provide employment to countless people in the society. It can be easily said that NASDAQ believes in not only growing itself, but creating an environment where organisations associated with it can also succeed and achieve their objectives. The NASDAQ OMX Group, as it is known today, was a result of its separation from NASD in 2006 and a merger with the Scandinavian exchange group OMX in 2007. This further strengthened its association, support, and commitment to technology and innovation across the markets globally.

The NASDAQ OMX Group provides transformative technologies for the entire life cycle of a trade, from risk management to trading to clearing to observation. Institutions and individual investors rely on NASDAQ’s reliable, pioneering technology, rule-based index construction, and comprehensive index services to facilitate investment, trading, risk management, and benchmarking activities.

During 2011, NASDAQ OMX licensees reported issuing at least 8,500 structured products linked to NASDAQ OMX indexes with the notional value exceeding $1.4 trillion in 24 countries. NASDAQ OMX indexes are widely used as benchmarks by plan sponsors, financial institutions and individual investors.

Over the years, NASDAQ has accomplished many milestones.

NASDAQ OMX enters the Islamic finance space It was the growing demand for Islamic financial solutions that persuaded NASDAQ OMX to launch its two Sharia-compliant indices at the height of the financial crisis. The Sharia indices were launched in collaboration with Edbiz Consulting who specialises in the Islamic banking and finance industry and hence have been branded accordingly [Edbiz-NASDAQ].

Edbiz Consulting acts as a Sharia advisor to the indices. Mr. Jacobs is of the view that as 36 | I sl a mi c Fi n a n ce R e v i e w

Year

Milestones

1971 1975

First electronic stock market launched Invents the modern IPO by listing venture-capital-backed companies and allows the underwriting syndicates to trade as market makers NASDAQ offer real-time trade reporting for 40 highest volume securities with the advent of NASDAQ National Market System NASDAQ-100 Index launched OM becomes the world's first public listed exchange NASDAQ enables Advanced Computerized Execution System (ACES) 1990 OM creates first automated securities trading system OM integrates the world's first derivatives trading and clearing platform NASDAQ surpasses the NYSE in yearly share volume The first exchange website, www.NASDAQ.com, goes live and quickly becomes one of the most visited investor sites on the internet NASDAQ is the first stock market to offer its listed companies a proprietary online service with company. Peer and industry trading data called NASDAQ Online NASDAQ becomes the world's biggest stock market by dollar volume The NASDAQ - 100 Index Tracking Stock (QQQ) ETF launches and trades 2.6 million shares in the first two hours Votes to restructure and spin off NASDAQ from the NASD into a shareholder-owned, for profit company 2001 NASDAQ sets share volume record- more than 2.19 billion shares traded NASDAQ launches dual listing by listing six NYSE companies NASDAQ launches the NASDAQ Datastore to give retail customer access to market transparency NASDAQ introduces the NASDAQ Crossing Network, a fully anonymous trade execution NASDAQ acquires OMX and changes name to The NASDAQ OMX Group Becomes the largest US stock exchange with matched volume in all US securities reaching a record high of 442 billion shares, 29% more than any other US exchange NASDAQ stock market named in S&P 500 Index NASDAQ OMX resells Corporate Solutions packages to other worldwide exchanges to offer to their listed companies NASDAQ OMX creates Sharia-compliant indexes to serve investors who wish to develop and maintain an Islamic investment portfolio Launched an integrated platform for media monitoring and sentiment analysis Kuwait Stock Exchange launched NASDAQ OMX trading platform eSpeed acquisition and acquisition of Investor Relations, Public Relations and Board support business of Thomson Reuters

1982 1985 1987 1988 1991 1994 1996 1997 1999 1999 2000

2004 2005 2006 2007 2007 2008 2009 2010 2012 2012 2013

Islamic finance industry continues to grow there are more tools to accurately measure the performance of this sector.

The Edbiz NASDAQ OMX Sharia Index family brings a new set of tools to those interested in measuring Islamic economic sectors and maintaining Islamic investment portfolios.

They offer Sharia-compliant solutions beyond the most basic Islamic equity funds. This index

family is comprised of securities that meet Sharia requirements as prescribed by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). Edbiz Consulting screens and monitors the portfolio on a quarterly basis. There are two stages to a Sharia review process: business screening and financial screening.

Business screens remove securities whose

NASDAQ OMX Sharia Index Family Edbiz-NASDAQ-100 Sharia Index [N100SI] Edbiz -NASDAQ -100 Sharia Cleansed Index [N100SIC] Edbiz-NASDAQ-100 Sharia Total Return Index [N100SITR] Edbiz-NASDAQ-100 Sharia Cleansed Total Return Index [N100SICTR] Edbiz-OMX Stockholm Benchmark Sharia Index [OMXSBSHARIA] Edbiz-OMX Stockholm Benchmark Sharia Total Return Index [OMXSBSHARIATR] Edbiz-OMX Stockholm Benchmark Sharia Cleansed Total Return Index [OMXSBSHARIACTR]

February 2014 Issue

involved in multiple businesses may also be screened out, if their revenue from Sharia noncompliant businesses is significant (usually 5%).

NDX and XNDX performance 5,000.00 4,500.00

NASDAQ OMX’s leadership and capabilities in technology play an important role in the Islamic finance industry. The NASDAQ OMX index creation process and rules-based, objective methodology, coupled with unparalleled market visibility stand tall against other index providers.

4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00

NDX

1/31/2013

1/31/2012

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0.00

XNDX

of interest. Sharia opines that if a company has a large amount of debt on its balance sheet, the likelihood is that the company is paying interest on it. Similarly if a company has a large portion of interest-bearing receivables, they must be receiving interest on it. Such activities also enhance the riskiness of these securities.

Further, through Sharia review, companies

primary activities are not in compliance with Sharia (alcohol, gaming, tobacco, pork, arms, interest-based banks and financial institutions, and entertainment). Financial screens remove securities whose line of business is Sharia compliant, but their capital structure is not, i.e., there is a large component of its capital structure that involves payment or charging

Edbiz-NASDAQ 100 Shari'a Industries 80.00000000% 60.00000000% 40.00000000% 20.00000000% 0.00000000%

Basic Materials

Consumer Goods

Consumer Services

Health Care

Industrials

Oil & Gas

Technology

Telecommunications

The Edbiz-NASDAQ 100 Sharia index replicates the performance of the NASDAQ-100, which includes the top 100 domestic and international non-financial securities, based on market capitalisation listed on The NASDAQ Stock Market. Each quarter, Edbiz Consulting receives the portfolio from NASDAQ, which then gets Sharia screened.

On average, about 65% of the portfolio of The NASDAQ-100 is Sharia compliant. The Edbiz-NASDAQ Stockholm Benchmark Sharia index replicates the performance of OMX Stockholm Benchmark, which is composed of 80 to 100 of the largest and most traded stocks on Sweden’s stock exchange (which serves as an indicator of the overall performance of NASDAQ OMX Stockholm Market). The index currency is Swedish Krona (SEK). As the index also includes financials stocks, after the Sharia review, nearly half of the stocks are regarded as Sharia compliant.

The Sharia indices are used to track Islamic economic sectors and maintain Islamic investment portfolios, while gaining exposure to the largest domestic and international securities listed on The NASDAQ-100 and the Swedish market. Institutional and individual investors are interested, as are plan sponsors, asset managers and financial entities that distribute financial products such as ETFs, options and other derivatives.

NASDAQ OMX Stockholm Sharia Industries

Performance speaks for itself

60.00000000%

While the availability and tapping into a virgin space is one thing, what gives competitive advantage over another organisation offering similar services to investors and stakeholders is the performance. The diagram below highlights the performance of the NASDAQ-100 against NASDAQ-100 Total Return.

50.00000000% 40.00000000% 30.00000000% 20.00000000% 10.00000000%

Basic Materials

Consumer Goods

Consumer Services

Health Care

Industrials

Oil & Gas

Technology

Telecommunications

Utilities

1/1/2014

12/1/2013

11/1/2013

10/1/2013

9/1/2013

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7/1/2013

6/1/2013

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2/1/2013 3/1/2013

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7/1/2012

6/1/2012

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4/1/2012

2/1/2012 3/1/2012

0.00000000%

As mentioned above, the NASDAQ-100 index is a non-financial index and hence does not include any financial security. Industries that form part of the index are Basic Materials, Consumer Goods, Consumer Services, Health Care, Industrials, Oil & Gas, Technology, and Telecommunications. The industry that carries w w w. i s l a m i c f i n a n c e r e v i e w. c o | 37

and NASDAQ-100 Total Return Index. This may be due to exclusion of highly leveraged organisations or whose business was not in compliance with Sharia and hence did not become the part of the Sharia indexes. It can be assumed that such companies have performed adversely and hence pulled the performance of the NASDAQ-100 down.

NASDAQ 100 vs Shari'a Indices Yearly Return 50

Return

40 30 20 10 0 2010

-10

2011

2012

2013

Years

NASDAQ-100 (NDX)

NASDAQ-100 Total Return Index (XNDX) Edbiz NASDAQ-100 Sharia Index (N100SI) Edbiz NASDAQ-100 Sharia TR Index (N100SITR) Edbiz NASDAQ-100 Sharia Cleansed Index (N100SIC) Edbiz NASDAQ-100 Sharia Cleansed TR Index (N100SICTR)

NASDAQ OMX Stockholm vs Shari's indices Yearly Return 20

Return

10 0

-10 2010

2011

Years

2012

2013

OMX Stockholm Benchmark_PI OMX Stockholm Benchmark_GI Edbiz OMX Stockholm Benchmark Sharia Index Edbiz OMX Stockholm Benchmark Sharia TR Index Edbiz OMX Stockholm Benchmark Sharia Cleansed TR Index

the highest weight among the eight industries is Technology. Two of the most recent entrants on the NASDAQ-100 were Facebook and Vimpelcom and as of January 2014, EdbizNASDAQ-100 Sharia index invested above 50% in the technology industry. It is followed

by Consumer Services and Health Care, which account for approx. 21% and 19% respectively.

The NASDAQ OMX Stockholm Sharia index has invested in 10 industries of which Industrial has the largest weight. As of December 2013 Industrial accounted for about 40% of the index. Other industries include Basic Material, Consumer Services, and Consumer Goods.

The NASDAQ OMX 100 Sharia indices have recently outperformed the NASDAQ-100

140

120

100

80 6/21/2010

10/21/2010

2/21/2011

DJ Islamic Market US TR

38 | I sl a mi c Fi n a n ce R e v i e w

6/21/2011

10/21/2011

Edbiz-NASDAQ-100 Sharia TR

Comparing the performance of Edbiz –NASDAQ 100 Sharia and Dow Jones Islamic Index The Dow Jones Islamic Market US Index measures the US universe of investable equities that pass Dow Jones’ proprietary screens for Sharia compliance. The selection universe for the DJIM US Index includes the components of the US benchmark index, which covers approximately 95% of the float-adjusted market capitalization of the underlying market.

30

-20

With regard to the NASDAQ OMX Stockholm benchmark, which has outperformed the Sharia indices, this may be primarily due to the financial securities that have peformed better.

This can be due to the affect of the recent financial crises and improving confidence in the European countries or markets.

2/21/2012

The correlation between the EdbizNASDAQ-100 Sharia TR Index and the Dow Jones Islamic Market US TR Index is 95.5%. As one would expect with a high correlation, both indexes have moved very much in tandem with one another over the past two years.

Returns have been almost identical at 33.65% and 33.62% with NASDAQ edging out Dow Jones.

With such a solid foundation, there is no way an institution like NASDAQ OMX will experience a nose dive. It has entered the Islamic finance space where ample opportunities exist and with the development of the overall industry, sophisticated investors and stake holders of indices will be interested in the leadership qualities of NASDAQ OMX. For about five years, NASDAQ’s commitment to this important market is clear, and there is an interest to enhance the indices on the supply side. Indices will be developed based on the important industries and geographical locations like the Far East and Middle East, which will not only assist in acting as a benchmark for the industry, but also as a barometer for investors who wish to structure important products and services.

The NASDAQ OMX story has been a successful one so far in the conventional world, and there is no doubt that it has all the capabilities to repeat its success in the Islamic finance industry.

SAB,

guiding your IT ambitions

SAB, vendor of software solutions for Banks and Financial Institutions Your global competitive advantage locally www.sab2i.com - sales@sab2i.com

Interview

Irfan Siddiqui President & CEO, Meezan Bank Ltd, Pakistan To begin, Meezan Bank is the first Islamic Bank in Pakistan. Can you share your experience of developing the concept and bringing it into fruition? What were the challenges of establishing an Islamic bank in Pakistan?

Meezan Bank started as an investment bank.

(Al Meezan Investment Bank) The major challenges faced at the time were the lack of understanding and information in the general public about Islamic banking, and insufficient availability of human resources with the requisite training and experience in Islamic banking. We worked hard in educating the public and our customers about Islamic banking by conducting seminars and training workshops, both in-house and outside the Bank.. Alhamdulillah, the level of understanding and acceptance of Islamic banking in the public along with the growth of the Bank over the years is proof of the success of our efforts.

At that time, the Bank had a very limited product suite coupled with limited outreach.

Alhamdulillah, with the passage of time, we have been able to address all these issues through building a large branch network and developing strong Shari’a research and product development capacity.

40 | I sl a mi c Fi n a n ce R e v i e w

The share of the Islamic finance industry as a proportion of the total financial industry in Pakistan increased – from 1% in 2002 to about 9% in 2013. In your opinion, what are the major factors behind this growth and how much further do you think Islamic banking can grow in the country?

Muslims comprise over 97% of Pakistan’s population. Most of the population understood that interest (riba) was prohibited; however, due to non-availability of Islamic alternatives to conventional banking, they were impelled to fulfill their banking needs through conventional banks. But, Alhamdulillah, Meezan Bank and other Islamic banks have provided a viable and Shari’a-compliant alternative for society, generating the growth in Islamic banking that we are witnessing today. If we work with sincerity towards our vision, which is to establish Islamic banking as banking of first choice, this industry can reach great heights.

What are the primary factors that have led to Meezan Bank’s success?

We are grateful to Almighty Allah whose blessings paved our way to success. From

the very first day, we have been sincere and committed to our vision. In the beginning, several opportunities that were not Shari’a compliant were presented to the Bank. We could have made a decent profit but we refused to be part of such transactions. This resulted in positive publicity and increased interest in the Bank and its offerings. We are also fortunate to have the first-mover advantage placing us in an admirable position with those customers who are interested in Islamic banking. Finally, we have a dedicated team of Islamic banking and Shari’a professionals who are continuously in the process of researching and developing innovative Shari’a-compliant products for the needs of our diverse customers.

Building awareness of Islamic banking in the country has been a challenge. How is Meezan Bank, which has the largest outreach in the country, tackling this?

We consider building awareness of Islamic banking as both a part of our mission as well as a business need. We hold seminars and workshops on Islamic banking for both the general public and our customers across the country to create awareness and dispel misunderstandings about Islamic banking.

February 2014 Issue

4 Walid Hegazy “Contemporary Islamic finance: From socioeconomic idealism to pure legalism� Chicago Journal of International Law Volume 7, Number 2, Winter 2007

w w w. i s l a m i c f i n a n c e r e v i e w. c o | 41

Interview

We also actively use the outreach offered through social media channels to disseminate information about Islamic banking within and outside the Bank. Our staff members regularly teach Islamic banking courses at several universities, contributing towards enhancement of awareness about this field among the youth.

The State Bank of Pakistan (SBP) has recently announced a marketing plan to improve awareness in 42 | I sl a mi c Fi n a n ce R e v i e w

the country. How is Meezan Bank contributing to that?

you think there is more Meezan Bank can do?

Meezan Bank is very actively participating in the campaign initiated by SBP. I have been nominated as the Chairman of the Steering Committee. We are working in close conjunction with SBP to ensure that this awareness program goes well.

Meezan Bank emphasizes the importance and value of SMEs and agriculture as it has great synergy with Islamic finance. We have a separate SME and Agriculture Finance Unit with specialized and experienced staff members. SME is an undocumented but high yield sector. Due to the wide range of Islamic products, competitive rates and an increasing branch network, Meezan Bank is catering to

How has Meezan Bank supported SMEs and the agricultural sector? Do

February 2014 Issue

How has the overall distressed condition of the country affected Meezan Bank?

and internationally. What has been your strategy and how do you hope to continue it in the future?

Although the banking sector has seen some tough times with net spreads in a tight squeeze, Alhamdulillah, Meezan Bank continued breaking all previous records in terms of both growth and profitability. We are now the 8th largest bank in Pakistan in terms of the size of branch network. We remain very optimistic about the future growth and success of the Bank.

The Bank has built an excellent human resource base of Islamic bankers for both local and international markets by providing nurtured and consummate professionals with hands-on exposure to state of the art products with strong adherence to the rules of Shari’a.

We consider this as an element towards achieving our vision of establishing “Islamic banking as banking of first choice.”

Recently, the Finance Minister has set up an Islamic Finance Committee; can you please share the aims and objectives of it with us?

Our strategy has remained focused on attracting fresh talent from 1st and 2nd tier business schools at entry level and training them in our products, systems and culture. For senior positions, we elevate the successor on merit, either searching inside the organization or hiring talent from outside. The elevation strategy has provided good career growth opportunities to existing employees, hence contributing towards morale.

We appreciate the efforts taken by the government in setting up this committee which will, InshaAllah, suggest practical steps for implementing a Shari’a-compliant financial system. It will develop and recommend practical measures to resolve the challenges present today for the widespread implementation of a Shari’a-compliant system including solutions for an Islamic secondary market and money market for liquidity management.

The Committee will also chalk out a roadmap and propose a timeline highlighting progress.

It will study international implications of converting conventional banking into Shari’acompliant banking and conduct an analysis of the possible legal obstacles in doing so, and the changes required to remove these obstacles.

Meezan Bank recently won Best Research and Development at the Global Islamic Finance Awards (GIFA) 2013 held in Dubai on 26th November, 2013. How would you define this achievement?

almost all banking needs of SMEs. Our large SME customer base has helped us to diversify into various business sectors. Apart from financing, the Bank is also acting in an advisory role to promote Islamic banking, for example, with relation to the Prime Minister’s Youth Loan Scheme. For agriculture, we are adopting a prudential approach and gradually penetrating into this sector. We are both booking small tickets in agriculture as well as going for corporate deals.

Our core strength lies in research and development in Islamic finance. Today Meezan Bank has one of the most comprehensive product suites in the global Islamic finance industry. We have more than 30 professionals from diverse backgrounds including Shari’a scholars, chartered accountants, business graduates and lawyers, who are dedicated to continuous research and developing new products to address the business needs of our customers in a Shari’a-compliant way.

Meezan Bank has contributed immensely to building human resources for the industry in Pakistan

Our in-house and public learning programs are designed to enhance the Islamic banking knowledge and skill set of our staff, our customers and the general public, thus creating awareness and removing misunderstandings prevailing in the public about Islamic banking.

Can you please share your professional experience and education history before Meezan?

I am a Chartered Accountant from England and Wales. I started my career with Abu Dhabi Investment Authority in Abu Dhabi as a Senior Accountant from 1980-1981, Then I moved to Exxon Chemical (Pakistan) Ltd, taking the position as a Senior Business Analyst from 1981-1982, Following this, I joined Abu Dhabi Investment Company as Manager Finance & Operation (1982-1987) before moving to Kuwait Investment Authority as Advisor (KIA) (1987-1989).

In 1989, KIA deputed me as General Manager at Pakistan Kuwait Investment Company (Pvt) Limited (Pak-Kuwait). Pak-Kuwait is a joint venture between the Government of Pakistan and the Government of Kuwait.

My wife’s perseverance in warning me about working with riba eventually led me to think about building an Islamic banking institution in Pakistan. I gathered sponsors for the proposed Al Meezan Investment Bank Limited (AMIBL).

By the grace of Almighty Allah, the Bank came into existence and transformed into Meezan Bank Limited within a very short period of time. w w w. i s l a m i c f i n a n c e r e v i e w. c o | 43

Akhuwat Charity Dinner 24th May 2014 London

We strive for a society where everyone has freedom... freedom of choice, action, self-expression, and most importantly, freedom of self development.

All the funds raised will be sent to Akhuwat for their activities in Pakistan.

Edbiz Consulting

To book your place or sponsor the event, please contact "akhuwat@edbizconsulting.com"

Islamic Bankers Association

Introduction: Islamic Bankers Association (IBA) is a new international industry representative body for practitioners of Islamic banking and finance. On the 20th of February 2014, it became officially incorporated in United Kingdom, with its registered office in London. IBA will soon open its membership to individuals and corporates, and aims to become the largest industry representative body for Islamic banking and finance in the world.

Membership categories include: Corporate Membership: For all Islamic banks and the institutions offering Islamic financial services – IIFS (Annual Fee: £3,500) Associate Corporate Membership: For all businesses that offer their services to Islamic banks and IIFS (Annual Fee: £5,000) Individual Membership: For all the employees of Islamic banks and IIFS, with work experience of a period of five years or more (Annual Fee: £100) Young Professional Membership: For all the employees of Islamic banks and IIFS, with work experience of a period of less than five years (Annual Fee: £50) Associate Individual Membership: For any professional whose application is endorsed by at least one existing member of IBA (Annual Fee: £100) Islamic Bankers Association is a non-profit organisation, registered in England and Wales as a company limited by guarantee, and does not offer any financial products and as such is not regulated by Financial Conduct Authority.

If interested in becoming a member, please get in touch with: Dr Humayon Dar, Convener, Islamic Bankers Association, by emailing him on:

humayon@humayondar.com

2013 Lest we not celebrate the sage Journey fraught of turmoil, fought on the fractured soil Under the harrowing sun that lights his brow And in the deathly dark alight by the flickering glow He courses through, his hands coarse, scabrous, Softness long gone from the harshness of toil But what of toil when for pure aim and cause Diligent under commitment, and committed to ends Action and words thus spread vast and far, Touching the hearts of strangers never seen Should we not then acknowledge the sage?

Forgetting formidability that resonate in age.

What shame would account to us to not be of praise?

Certainly so, life that meanders, Meanders accorded to their ways.

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A Night of Celebration GIFA aims to recognise the efforts, highlight the best practices in Islamic banking and finance and celebrate the success of individuals and institutions with an aim to promote social responsibility, Shari’a authenticity and commitment to Islamic banking and finance.

W

ere it a fractious occasion for such a wonderful night, when industry paragons are honoured for their devotion to an industry still niche, yet drawing the attention of governments and financiers throughout the world for its fundamental values? No! It was not a time of fulminations but of celebrations. And it so it came to pass in the fabulous ballroom of the Shangri-La, Dubai, Edbiz Consulting successfully organised its 3rd annual Global Islamic Finance Awards (GIFA) ceremony on November 26th, 2013 in the fabulous ball room at Shangri-La, Dubai.

The room, decorated in splendour was a fitting tribute to the achievements of individuals and institutions that have contributed much to the Islamic finance industry over 2013.

GIFA was attended by over 200 delegates from across the world. Present at the event were current and former government representatives along with practitioners of leading international banks and financial institutions. In the gallery of the great and the good, HRH Raja Dr Nazrin Shah, recipient of the Global Islamic Finance Leadership Award 2012 delivered the keynote speech on the night. In his speech he shared his satisfaction on what the Islamic banking and finance industry has achieved, and optimism on what it can accomplish in the future. Raja Nazrin Shah’s speech balanced the good with the concerns of the industry: a practical speech from a pragmatic man, and one applauded by the house-full crowd in the room. Raja

February 2014 Issue

Nazrin presented the prestigious Global Islamic Finance Leadership Award 2013 to HE Mr Shaukat Aziz, Former Prime Minister of Pakistan.

HE Shaukat Aziz was presented this award for his efforts and support for the growth of the Islamic finance industry in Pakistan during his tenure and the concomitant market growth of Islamic banking during his term in office. Mr Aziz shared his views on the developments in the Islamic banking and finance industry.

There were in total 24 categories. Top awards included Islamic Banker of the Year 2013, which was received by Dato’ Sri Zukri Samat, Managing Director, Bank Islam Malaysia Berhad for his outstanding contribution for the year.

The honour could not have been any better except for a personal congratulatory message from Dato’Mohd Najib Tun Razak, Prime Minister of Malaysia who tweeted regarding this great achievement. Over a million people follow Dato’ Mohd Najib Tun Razak on Twitter.

Dubai Islamic Bank (DIB), the first world Islamic bank, received the Best Islamic Bank 2013. The award was received by Dr. Adnan Chilwan, Chief Executive Officer, Dubai Islamic Bank.

Islamic Finance Personality 2013 was received

by Mr Hasan Al Jabri, CEO, Sedco Capital for his commitment and support of Islamic finance and social responsibility. GIFA Special Award 2013 was presented to Governor Central Bank of Nigeria HE Sanusi Lamido Sanusi for building awareness and overseeing the gradual strengthening of the Islamic banking industry in Nigeria, one of the first countries to start Islamic banking in Africa. National Bonds received the Best Savings Product 2013. Receiving the award, Mr Mohamed Qasim Al Ali, CEO, expressed his happiness and was effusive about the efforts of GIFA in promoting the achievements of industry members.

“National Bonds is pleased to be part of this year’s highprofile Global Islamic Finance Awards. The international event has annually highlighted best practices in Islamic banking and finance, with the ultimate objective of promoting social responsibility and greater credibility for Shari’a compliant financial alternatives. We look forward to continuously expanding our product offerings to keep pace with dynamic customer-needs. We would also like to assure all our bondholders of our lasting commitment to offer a distinctive competitive advantage in managing their savings.” Mr Mohamed Qasim Al Ali, CEO, National Bonds

HRH Raja Dr Nazrin Shah, recipient of Global Islamic Finance Leadership Award 2012

HE Shaukat Aziz, recipient of Global Islamic Finance Leadership Award 2013

HE Shahid Malik, Former Minister for International Development, United Kingdom

Dr Adnan Chilwan received Best Islamic Bank 2013

Mr Hasan Al Jabri, received Islamic Finance Personality 2013

Mr Mohammed Qasim Al Ali received Best Islamic Savings Product 2013

Finance Accreditation Agency (FAA), a new institution set up by Bank Negara Malaysia and Securities Commission Malaysia for independent quality assurance and accreditation, received Best Supporting Institution 2013 an award previously won by DDCap for the last two consecutive years.

“FAA is very pleased to receive this award which underlines our strong commitment to develop high performing financial professionals in the Financial Services Industry (FSI). The award demonstrates our efforts as a global leader in ensuring quality learning in the FSI”. He also shared his thoughts on GIFA, “The Global Islamic Finance Awards focuses on best practices in Islamic Finance and acknowledges success of all players in the industry. Such recognition is essential as it celebrates the kind of services that brings advancements to the industry”. Dr Amat Taap Manshor, CEO, Finance Accreditation Agency

ADCB Islamic Banking received Best Islamic Window 2013 for the second consecutive year highlighting their continuous strength within the market. They also received an award for Most Innovative Product 2013 for their Emirati Millionaire Savings Account (EMSA). This is an innovative Shari’a compliant product for UAE nationals tailored to support their individual needs. The product not only meets Shari’a requirements but also follows the Islamic tradition of distributing gifts.

The monthly rewards include cash prizes of AED 550,000. The objective of EMSA is to increase ADCB’s national customer base and acquire low cost funds from existing and new customers. Bank Nizwa, the first fully fledged Islamic bank opened in Sultanate of Oman received Upcoming Islamic Bank 2013. Mr Moinuddin Malim, CEO Mashreq Al Islami, a veteran in Islamic banking and finance in the UAE, received Upcoming Personality in Islamic Finance 2013. On the technology end, International Turnkey System (ITS) received Best Islamic Finance Technology 2013 for the third consecutive time. Islamic Finance Advocacy Award 2013 was presented to HE Linar Yakupov, CEO Tatarstan Investment w w w. i s l a m i c f i n a n c e r e v i e w. c o | 47

The Global Islamic Finance Awards was organised in conjunction with the 5th World Islamic Retail Banking Conference (WIRBC) held on November 26 and 27, 2013 at the Shangri-La Hotel, Dubai.

Development Agency (TIDA) for being a catalyst in the promotion of Islamic banking and finance in the Russian Federation. The Islamic Fund Manager 2013 award was presented to AmInvest while Best Islamic Fund 2013 was presented to F&C Shari’a Sustainable Opportunities Fund for its performance in challenging conditions, and its upmost commitment to Islamic finance and social responsible industry. ARSA Lawyers received Best Islamic Finance Law Firm 2013. Datuk Abdul Raman Saad, Managing Partner received the award in person.

“We are humbled and greatly appreciate the recognition of receiving the Best Islamic Finance Law Firm 2013. It is a tremendous validation given by Global Islamic Finance Awards in recognising our expertise and contributions toward progressing Islamic Banking & Finance products and services”. Datuk Abdul Raman Saad, Managing Partner, ARSA Lawyers These awards were presented by HE Mr Shahid Malik, Former British Minister for International Development. Next year’s award ceremony will be held, as usual, in the third quarter of 2014. Individuals, banks and financial institutions are requested to send in their nominations in the first quarter.

“GIFA honours the agents and the institutions that continue to contribute to the Islamic banking and finance industry. To become a $1.63 trillion industry in 40 years testifies to the phenomenal efforts of financial institutions, governments and scholars to build the industry almost from dust and sustain it in an ever burgeoning global village”. Professor Humayon Dar, Chairman of the GIFA Awards Committee

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About GIFA GIFA selects winners based on a proprietary methodology developed by Edbiz Consulting. The methodology stays available on Edbiz Consulting website should anyone wish to understand.

There are a number of awards offered in Islamic banking and finance industry but GIFA stands tall in its transparent methodology of choosing winners and organisation of the event itself. These awards inspire, encourage, appreciate, motivate, reinforce, nurture, and thank the individuals and organisations for their achievements and hopes to promote excellence within the society.

February 2014 Issue

to DIB’s commitment and drive towards continuous advancement and progression in this segment which is fast becoming a real and plausible alternative to the conventional banking and finance industry.

Dubai Islamic Bank wins “Best Islamic Bank 2013” Dubai Islamic Bank (DIB), the first Islamic bank in the world and the largest in the UAE, was named the “Best Islamic Bank 2013” at the Global Islamic Finance Awards 2013, at a ceremony held recently in Dubai as part of the 5th World Islamic Retail Banking Conference.

Dr. Adnan Chilwan, Chief Executive Officer, Dubai Islamic Bank, said: “Over the last four decades, we have built a franchise that has not only become the cornerstone of the Global Islamic Finance industry but has also paved the way for the incredible growth witnessed by the sector so far. The recognition received by the institution today is a further testament

“The global Islamic financials assets are expected to cross US$ 2 trillion by 2014 with targeted growth of approximately 20% in the core markets around the world. However, this requires constant innovation, efficiency building and significant inroads in the area of governance and transparency. DIB, with its renowned expertise and infallible vintage, is strongly positioned to support the growth expectation around this sector whilst simultaneously being perfectly placed to further the strategic vision of His Highness Sheikh Mohammed Bin Rashed Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, of making

the emirate, the global capital of the Islamic Economy”.

DIB’s recognition as “Best Islamic Bank” closes another successful year for the bank and adds to the growing list of awards it has received for its comprehensive suite of leading Shari’a compliant solutions. Indicative of this success, the bank recently won “Best Corporate Bank,” “Best Credit Card” and “Best Banking CSR Initiative” at the Islamic Business & Finance Awards.

Abdul Raman Saad and Associates [ARSA Lawyers] receives “Best Islamic Finance law Firm 2013” ARSA Lawyers started in January 1979 by Datuk Dr Abdul Raman Saad and have offices in Kuala Lumpur, Johor Bahru and Melaka, Malaysia. ARSA Lawyers is a full service law firm with emphasis on areas of Islamic Banking & Finance (IBF), Islamic REIT, Information and Communications Technology (ICT) and personal data protection as exciting areas of growth. ARSA Lawyers is certified with the international accreditation of ISO 9001: 2008 for quality management systems that produces time-and-cost-efficient deliveries to its clients.

In 2009, Tan Sri Dato’ Muhyiddin Yassin the Deputy Prime Minister of Malaysia, while officiating ARSA Lawyers’ brand launch, congratulated ARSA Lawyers for its pioneering efforts in promoting Islamic Finance, both

locally and globally. In 2010, ARSA Lawyers was nominated as one of the leading Islamic Finance lawyers for Islamic Banking & Finance, Islamic Project Finance and Islamic Real Estate

by Islamic Finance News.

ARSA Lawyers offers expertise in local and cross border Islamic Banking and Financial (IBF) services for various industries, notably in real estate and property and in ship financing.

ARSA Lawyers is comprised of dedicated and specialized professionals with knowledge

of Fiqh Muamalah and who have practical experiences in handling IBF products and the issuance and structuring of sukuk and Islamic REITs. ARSA Lawyers’ notable transactions in IBF include: Issuance of the first Islamic municipal bonds in Malaysia.

Issuance of private debt securities as well as

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GIFA 2013 a water concession company on the issuance of RM1.28 billion Islamic debt securities.

Al-`Aqar KPJ REIT (now known as Al-`Aqar Healthcare REIT), Malaysia’s first Islamic Healthcare REIT. ARSA Lawyers was the first law firm in the world advising on the creation of an Islamic Healthcare REIT. Involvement in 2008 in the first successful conversion of AXIS REIT, a conventional REIT to a Shari’a compliant REIT. This exercise successfully produced an alternative method in

encouraging Middle Eastern Sovereign funds and Muslim Fund managers in accessing high quality assets.

Issuance of Bai-Bithaman Ajil Islamic Debts Securities (BAIDS), sukuk musharakah mutanaqisah, Islamic medium term notes programme (IMTNs) and mudharaba municipal bonds.

Syndicated financing under the concept of ijarah muntahiah bitamlik and the restructuring and innovation of an Islamic facility for a

syndicated ship financing transaction and other investment advisory services in Malaysia.

Multi-million ringgit cross-border Islamic syndicated financing transactions for the purchase of healthcare commercial assets in Indonesia and Australia.

Maritime financing to Islamic financial institutions for financing purchase of local and foreign flagged vessels by Malaysian companies, the construction of vessels and financing of maritime equipment.

Bank Nizwa receives “Most Upcoming Bank 2013” Bank Nizwa began trading in 2013 after a successful IPO and opened its doors to the public in January of that year. The IPO was 11 times oversubscribed and the bank started with 150m Omani Rials. It has taken the responsibility for promoting the true principles of Islamic banking- honesty, integrity, transparency and equality- and weaving them into the very fabric of the financial service industry in the Sultanate of Oman. It was the first fully fledged Islamic bank to be set up after the Royal Decree was announced in December 2012, thus immediately serving the needs and wants of the business and retail community.

The first Islamic bank in Oman has heralded a new era for banking in the country and has opened seven branches in 2013. The bank offers its customers the best Islamic banking experience and has invested heavily in its technology and infrastructure to ensure its success.

Since its operational launch in early 2013, Bank Nizwa has expanded its product and services portfolio to include Auto Murabaha, Goods Murabaha, Home & Land Murabaha, service Ijarah, Home and Land Ijarah. In addition, Mudarabah based investment account.

Since inception, the bank has raised 28 million Omani Rials in deposits while the net financing book has closed at 30.6 million Omani Rials.

There are also plans to launch ‘construction finance’ in the immediate future which will meet the market’s housing needs. Bank Nizwa’s

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savings account offers customers a Shari’a compliant opportunity to invest and earn a return on their money by setting aside some funds each month.

Bank Nizwa has a cohesive strategy to ensure that it is not only the first Islamic bank in the Sultanate but also the best bank for the people of Oman. Since inception, Bank Nizwa has continued to steadily penetrate the financial market and to make a solid contribution to the economy of the Sultanate. Its financial prowess coupled with its strong ethos to create community awareness of Islamic finance showcases it as a professional, service orientated bank, committed to its customers and to the principles of Shari’a. Governed by the Central Bank of Oman (CBO), it meets the needs of both the corporate and retail customer. its long term strategy is simple: to be a leading, global bank, born in Oman and committed to the communities in which it does business. It will continue to create a solid base for Islamic finance ensuring that it

becomes a serious contributor to the country’s growth and success.

Bank Nizwa has already chalked up major successes which are proving very significant to its positioning as the leading Islamic bank in Oman. These achievements are proof of a solid performance and strong market position.

In the past 10 months, Bank Nizwa has won several awards in different categories including “Seventh Oman Web Awards’. The awards showcased the banks website design and commended it for having instructive content and user friendliness. Further it received “Best Customer Service in the Banking Service’, ‘Arab Golden Coin, pioneer of Islamic banking in the Sultanate of Oman’ award which was presented at the Annual Arab conference in Beirut.

Now with the ‘Most Upcoming Islamic Bank 2013’ under its belt, the stage is set to welcome a new era in Islamic finance in Oman with Bank Nizwa at the helm.

February 2014 Issue

A list of all the winners and related categories is as follows: Global Islamic Finance Leadership Award

HE Mr Shaukat Aziz

Best Islamic Bank

Dubai Islamic Bank

Best Takaful Solutions Provider

FWU Global Takaful Solutions

Islamic Banker of the Year

Dato' Sri Zukri Samat

Best Islamic Fund Manager

AmInvest

Best Islamic Finance Qualification

Bachelor of Islamic Finance and Banking (BIFB) Universiti Utara Malaysia

Best Islamic Finance Education Provider

CIMA

Best Islamic Structured Products Platform

Societe Generale

Best Technology Provider

International Turnkey Systems (ITS)

Best Islamic Finance Law Firm

Abdul Raman Saad & Associates [ARSA LAWYERS]

Best Supporting Institution of the Year

Finance Accreditation Agency (FAA)

Upcoming Personality in Islamic Finance

Mr. Moinuddin Malim

GIFA Special Award

HE Sanusi Lamido Sanusi - Central Bank of Nigeria

Best Sukuk Deal of the Year

Axiata Group Berhad - CIMB Islamic

Islamic Social Responsibility Award

SEDCO Capital Global Funds

Best Research and Development in Islamic Finance

Meezan Bank

Islamic Finance Personality of the Year Award

Hasan Al Jabri - CEO SEDCO Capital

Most Innovative Product

Emirati Millionaire Savings Account by ADCB Islamic

Best Islamic Banking Window

ADCB Islamic Banking

Best Islamic Fund

F&C Sharia Sustainable Opportunities

Best Islamic Savings Product

National Bonds

Upcoming Bank in Islamic Finance

Bank Nizwa

Best Islamic Microfinance Institution

Amanah Ikhtiar Malaysia

Islamic Finance Advocacy Award 2013

Mr. Linar Yakupov - TIDA w w w. i s l a m i c f i n a n c e r e v i e w. c o | 51

GIFA 2013 effective business management related to Muamalat, Islamic finance, Islamic economics and Islamic management. It aims to produce future business leaders with the tools required to make strategic decisions in business environments and inculcate the thinking needed to adapt and execute plans for the betterment of business, society, and environment. This is all underlined by encouraging the Islamic ethical ethos within individuals.

Universiti Utara Malaysia was the recipient of ‘Best Islamic Finance Qualification Award 2013’ which offer a Bachelor of Islamic Finance and Banking (BIFB) program. The award is a recognition for UUM for their courses which seek to develop talent in the Islamic banking and finance industry. UUM started offering Muamalat and Islamic Finance studies in 2003.

It also offers the Islamic Financial Planner (IFP) certification, a professional qualification included in the BIFB program. Through the Islamic Business School (IBS), UUM has taken a proactive approach towards preparing

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students in a competitive job market, and the award acknowledges the qualifications and the high standard of teaching on offer. The Dean of Islamic Business School (IBS), Assoc. Prof. Dr. Asmadi Mohamed Naim received the award on behalf of the Vice-Chancellor, Prof. Datuk Dr Mohamed Mustafa Ishak, who was unable to attend due to prior commitments.

UUM Islamic Business School (UUM IBS) was established as a school in UUM College Of Business (UUM COB), Universiti Utara Malaysia (UUM ) to provide innovative and

UUM IBS is also proud of its position as the first Islamic business school in the region that has a comprehensive pool of lectures in various aspects of Islamic business management such as Shari’a advisory, Islamic finance and banking, Islamic economics, Islamic accounting, Islamic entrepreneurship, Islamic human resource management, Islamic management, Islamic marketing, zakat management, bait ul mal management, Islamic administration and etc.

The school’s core values are aptly embodied in the following five major trusts:

February 2014 Issue

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Pause for Thought

Charitable Giving:

Donation-Based Model of Banking T

he c onventional banking model is based on deposits. Banks accept deposits and use the money to offer interest-bearing loans to individuals and businesses. This is a standard model used all over the world, and is now being used even by many microfinance institutions that emerged as non-bank entities from the 1960s onwards.

In Pakistan, the State Bank of Pakistan is encouraging microfinance institutions to set up microfinance banks to ensure that such activities are brought into a tight regulatory net. Such is the power of the deposit-based banking model that even some otherwise successful non-bank institutions offering interest-free loans are tempted to set up banks to further expand their activities.

Some glaring examples of charity-based institutions are Edhi Trust and a relatively new micro lender, Akhuwat. Shaukat Khanam Memorial Cancer Hospital also continues to benefit from generous donations from across the country and from overseas. Charitable giving is so powerful that almost all medical research bodies, including Cancer Research UK, heavily rely on charitable giving to partially fund their operations.

According to an ICM Research survey, UK Muslims give more in charity than any other faith-based group, including Jews and Christians. In 2012, amongst the surveyed respondents, Muslims gave on average $567 per capita, Jews $412, Protestants $308 and Roman Catholics $272. Contribution from the atheists was merely $177 per capita.

This is a remarkable finding, which should be considered seriously for developing social enterprises in developing countries around the world, including Pakistan, where charity plays a tremendously important role in the absence of a state-run social security system.

According to on-going research by Edbiz Consulting, a UK-based think tank, a charitym i c Fi n a n ce R e vvii e w 54 | I sl a mi

based system can be developed in Pakistan to generate Rs18 billion on a monthly basis from the top 10% population of the country.

Professor Humayon Dar

of Rs100,000 to Rs2 million to about 100,000 individuals in the age bracket of 25 to 45 years.

It is based on an assumption that each affluent individual in the top 10% of the population is incentivised to contribute Rs1,000 on a monthly basis. This model of charitable giving also has the potential to improve social behaviour.

The way the government is attempting to disburse loans amongst youth is at best ad hoc in its nature. There seems to be no deep planning in the whole programme, and it appears as if the government is trying to counter the threat posed by PTI’s apparent popularity amongst the youth.

It is interesting to note that loan recovery rate for Akhuwat is 99.85%, the highest of its kind in the world. It proves the point that charitable giving and support for the poor helps in curbing the moral hazard problem – something of a major concern for banking institutions.

If the government plays smartly, a youth empowerment programme can be selffunding. There is a need to unlock the potential of charity in this country, where tens of thousands of families are already receiving support from charitable organisations, businesses and individuals.

Given the success of the likes of Akhuwat, it is worth considering development of a donationbased, as opposed to the existing depositbased, model of banking. The proposed model should have donation as the main product, rather than a deposit.

Given the huge potential of charity, there is a need to create a separate department within the Ministry of Finance, which should develop a framework for charity regulation, with the help of the likes of the State Bank of Pakistan.

There could be two main donations – a reversible donation and an irreversible donation. The former is a time-linked interestfree deposit that the donors should deposit with the bank for a specific time period. The latter is a simple donation that the donors should give through the bank.

The money thus raised could be used for extending interest-free business loans and financing based on the principle of profit sharing. While the poorest segments in society must be helped with interest-free loans, there is some anecdotal evidence that 70% of selfemployed individuals and families have some kind of preference for profit sharing-based financing.

This kind of institutional arrangement is far superior to the newly initiated Prime Minster’s Youth Business Loan Scheme, which is aimed at extending Rs100 billion in the form of loans

Despite the claim of having exceptionally intelligent personnel, the Ministry of Finance and Planning Commission have failed to develop a genuinely innovative development model for the country. There have always been foolhardy suggestions from personnel from these departments for productivity enhancement and growth.

Nevertheless, they have yet to develop an approach that takes into account ground realities and ideological foundations of the country. The charity sector offers an opportunity for such personnel to develop an innovative approach to finance and development.

If they fail to recognise the potential of charity, the West will once again take a lead role, and the so-called intelligentsia of the country will merely follow what others would have already developed and tried and tested.

Personality

Sohail Jaffer

Deputy CEO, FWU Global Takaful Solutions May 2012 and moved to the UAE.

Q: What inspires you?

Innovation, excellence, deal making and enhancing industry best practice standards.

Q: What is your education background?

I attended Karachi Grammar School and then went to London in 1970 and qualified as a UK Chartered Certified Accountant (FCCA).

Q: Who do you regard as your mentors? > Tan Sri Dato’ Dr. Zeti Akhtar Aziz, Governor, Bank Negara Malaysia > Dr Muliaman D. Hadad, the Chairman of Board of Commissioners of Financial Service Authority

Q: Please tell us about your background in banking and finance and how you became involved in Islamic finance.

Following my appointment as audit partner with the Price Waterhouse practice in Africa from 1984 until 1988, I became involved with banking in 1989 when I joined Citibank in London as Vice President, Financial Institutions Group. While at Citibank, I was initially involved with new business and product development for the Fund manager customer segment in the Financial Institutions Group EMEA. In 1996, I joined the sales team of Citibank’s Alternative Investment Strategies (AIS) group, responsible for asset gathering of multi-manager hedge funds, credit debt obligations (CDOs) real estate and private equity investments and also served as a member of Citi’s Hedge Funds “Policy and Strategy Committee” responsible for the evaluation and selection of external hedge fund managers.

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In 1997, I was appointed Chairman of the Alternative Investment Management Association (AIMA) and served 2 terms until 2000. I am currently the AIMA representative for the Middle East region based in Dubai.

>

Mr Iqbal Khan, CEO, Fajr Capital

Q: Islamic finance: a profession or passion?

Following my international banking experience with Citibank, I served as Senior Vice President within the International Mutual Funds Group of Scudder, Stevens and Clark Ltd in London between June 1998 and June 1999. I primarily focused on structured products and the creation of new mutual funds for the firm’s international distribution partners.

Passion - Islamic finance is aligned with principles of mutuality, profit and loss sharing, sense of value, fairness and the wellbeing of customers beyond solely financial aspects.

Transparency of terms and conditions, as well as socially responsible investing are attractive and the customer friendly attitude forms an integral part of the value proposition of Islamic finance.

I joined the FWU group in July 1999 and soon became involved in the group’s strategic business diversification initiative. During my business development trips and meetings with major bank client relationships in the Middle East, I first encountered Islamic finance and became interested in the field. I was appointed Deputy CEO of FWU Global Takaful Solutions in

I have in my spare time edited several Euromoney Islamic Finance publications on Retail Banking, Takaful, Asset Management, Wealth Management, Sukuk, Investment Banking; co-edited other investment publications on MENA and GCC; contributed to various industry publications; and been involved in selected industry events.

February 2014 Issue

Q: Where are you the happiest?

I enjoy working at FWU and being involved with emerging markets. These growth markets offer interesting business development opportunities and challenges particularly in MENA, Turkey and South-East Asia. This has recently prompted the FWU group to secure an exciting new cooperation agreement with Sinarmas MSIG Life to facilitate the distribution of family takaful investment-linked plans in Indonesia through business relationships with major banks.

In 2012, FWU group pioneered the first EU sukuk issuance by a German corporate, the largest within Europe. The US$ 55 million sukuk ijarah is another innovation by the FWU Group –it was the first Sukuk where the underlying asset was intellectual property (proprietary software, developed in-house, for use by FWU Group distribution partners).

In October 2013, FWU group issued another sukuk, the US$ 100 million salam III sukuk. The first tranche (US$ 20 million) in October 2013 was oversubscribed. The sukuk will be issued in amortizing tranches, with distributions made quarterly to investors on a fully amortizing basis.

Q: How physically fit are you and how important do you think it is for professional life?

Physical fitness is very important for someone with an active professional life. This is an area that I am continually working on, drawing inspiration and encouragement from my daughter in Dubai.

Q: What has been the greatest achievement of your life so far?

I would say contributing to the successful expansion of FWU’s international footprint within rapidly developing emerging and frontier markets. Over the past decade, FWU has entered, and thrived in several markets, including the Kingdom of Saudi Arabia, the United Arab Emirates, Pakistan and Malaysia.

More recently, FWU has extended its presence into Indonesia.

Q: After the recent push from the government of UAE towards a Halal economy, what do you think the future holds for Islamic banking and finance in the country?

Islamic banking and finance has a very bright future in the UAE stemming from a series of great initiatives by the government of

the UAE. All industries stand to benefit from these initiatives: from tourism and hospitality, through to construction. The ripple on effect of these government led programmes that bring people to UAE would also boost the prospects of Islamic banking and finance.

Importantly, the UAE is uniquely positioned at the crossroads between Europe and Asia, possessing a first class infrastructure and connectivity to promote and drive the Halal economy forward. This is expected to provide the catalyst that elevates the future prospects of Islamic banking and finance within the UAE.

Q: In your opinion how will the Expo 2020 benefit Islamic banking and finance in the UAE? During the years leading up to Expo 2020, companies and organisations will look to deliver new products and services as well as increase their current capacity. Many of these companies and organisations will look to access financing through the Islamic economy.

As a result, the number of sukuk issues is expected to increase.

On the retail side, consumer banking and wealth management are well positioned to benefit from the increased activity in the economy as the number of visitors and residents of the UAE swell in preparation for a showcase of the magnitude of Expo 2020.

Q: The focus of FWU is on pension funds and insurance solutions. Can you elaborate on this for the benefit of our readership?

FWU Global Takaful Solutions specialises in working with its licensed takaful partners to design white label family takaful unit-linked investments with customised innovative customer solutions, which combines life protection and savings for important life events, such as marriage and education. As FWU group is motivated to develop solutions that serve customer needs. Following demand from bank distribution partners and certain corporate clients interested in a defined contribution pension plan to retain and attract talent, FWU group is developing a fully Shari’a compliant long term savings plan designed to meet the retirement needs of the company’s employees.

Apart from product innovation, FWU group is also valued for its new systems development attuned to emerging market needs, speed of deal execution and significant depth and experience of its executive management team.

To provide a seamless bancassurance solution, and in order to facilitate the customer sales process and policy administration, FWU group has created a proprietary web portal that also provides its bancatakaful partners with an automated underwriting capability.

The portal provides bancatakaful partners with an internet-based point-of-sale and administration system designed to enhance product management, sales fulfilment and sales management. As a further enhancement, FWU now offer the web portal as a tablet solution. It also levels the playing field for consumer investment products by making the sale of a family takaful investment-linked plan as convenient as the sale of an Islamic mutual fund or an Islamic credit card. w w w. i s l a m i c f i n a n c e r e v i e w. c o | 57

58 | I sl a mi c Fi n a n ce R e v i e w

Islamic Finance Access Programme 16th &17th December2013, Fatimah Jinnah Women University, Rawalpindi-Pakistan

Dr Humayon Dar

Chairman Edbiz Consulting

Kamal Mehmood Mian

Director Fast Cables & Former, Head of Islamic Banking at Saudi Hollandi Bank

I

slamic banking and finance is in the second phase of its growth and development in Pakistan where existing financial institutions are expanding and new ones are being established to cater to the growing demand.

This has in turn given rise to the need for qualified and well trained human resources in order to keep up the pace.

There is no doubt that high quality education in Islamic banking and finance is a prerequisite for starting a successful career in this field.

This was obviously not the case during the first phase of development of Islamic banking and finance, when any banker and finance practitioner who had interest and passion for Islamic banking and finance had opportunities to excel in the then newly emerging industry.

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Muhammad Saleem Ranjha Director Akhuwat

Amer Khalil-ur-Rehman

PhD fellow at IIUI & Former Head of Islamic Corporates & Structured Finance Askari Bank

Edbiz Consulting organized its flagship programme IFAP for the first time in Pakistan on the 16th & 17th of December 2013. The two day training workshop was held at the Fatima Jinnah Women University Rawalpindi.

Delegates included practitioners from Meezan Bank, Bank Alfalah, UBL Ameen, MCB, Soneri Bank, Habib Metropolitan Bank, MCB-Arif Habib Savings & Investment Limited and HBL. Academics included faculty members from Quaid e Azam University, Bahria University, University of Arid Agriculture Rawalpindi, SZABIST, National University of Computer & Emerging Sciences, IIUI and FJWU. The workshop began with an opening address by the Vice Chancellor of Fatima Jinnah Women University Dr Samina Amin Qadir

Imran Hussain Minhas

Joint Registrar/Modarabas Islamic Financial Institutions Wing at SECP

followed by a few comments from the Dean of Faculties, Dr Naheed Khan. Both women stressed that there is a lot of potential for the Islamic banking. However, Dr Samina remarked that the financial crisis has traumatized economists and current economic system yet Islamic economics, banking and finance has still to prove itself as a viable alternative.

Dr Humayon Dar, who travelled to Pakistan from UK for this IFAP, delivered the core training. A veritable tour de force, Dr Dar’s lectures proved once again why he remains a leading thinker and trainer in Islamic banking and finance. His lectures encompassed a broad range of topics beginning with an introduction to Islamic banking and finance and an insight into Riba and Gharar followed by an insight

February 2014 Issue

Depiction of Riba Riba al Nasia and Riba al Fadl can be explained by this graphical representation.

Tj

450

450

XB

2

t2

(X AB )2

t1

(X AB )1

t0

(X AB )0

a

1

b

0

c

XB ( paid later at t 2 ) > XA ( paid now at t 0 ): Riba XB ( paid at spot ) > XA ( paid at spot ): Riba XB ( paid later at t 1 ) > XA ( paid at spot ): No Riba

1

(X BA )0

XA

The Islamic law of contract is very similar to common law concept of contract in that for a contract to exist there needs to be offer and acceptance, consideration and intention to create legal relations. (Although this is not strictly how Islamic scholars described the contract). Major building blocks of a contract also included the state of contracting parties (sane or insane) and the subject matter. In considering all these elements of a contract, this results in a tripartite classification. If all elements are present, then they would be considered valid. If the elements are there by certain conditions are not met (for instance, the price is uncertain) then it the contract is voidable. If an element is missing, or does not meet the criteria (e.g. the subject matter of the contract is alcohol) then the contract is considered invalid and has failed to create a binding relationship.

Point B= Person B trades a small quantity of the commodity at time Ti with Person A who delivers a higher quantity at the same time Tj . This would be regarded as Riba al Fadl

There are many different types of bilateral contracts. Each has their own elements and conditions. Transplanting these contracts into the modern day requires a deep understanding of both Islamic and conventional legal approaches to contracts. In a globalised world, one marked by complexity, profound comprehension has led to interesting innovations Islamic legal thinking. One particular, and pervasive, issues is the law behind foreign exchange transactions and the trading of currencies. AAOIFI Shari’a standards have helped clarify the parameters of foreign exchange transactions, which are susceptible to ribawi consequences. According to their standards regarding the permissibility of trading in currency:

Point C = Persons A and B exchange the same amount of good but person B delivers at a later date. There is no Riba.

• Both parties take possession of the counter values before the exchange

t1

Ti

Legend Graph (Tj:Ti) = Time Graph (XA:XB) = Commodity (Commodity assumed the same) (XΑΒ)t = Amount of an asset given by a person A to a person B at time t (XBA)t = Amount of the same asset given by person B to A at time t 45º line represents equanimity in quantity and time (i.e. if Tj = Ti then trade happens on spot; if XΑΒ = XBA then the same amounts of the Commodity is traded) Explanation Point A = Person B trades a small quantity of the commodity at time Ti with Person A who delivers a higher quantity at a later time Tj . This would be regarded as Riba al Nasia

into the evolution of Islamic banking and finance in Pakistan and the components of the Islamic banking industry. This was just Session1.

more so, as that of yesteryear. From these two key pillars, classical Islamic law developed its own system of contractual law.

For the second session Dr Dar put on his legal hat on to discuss the classical Islamic contracts that have been modified for present day exigencies. It is often forgotten that classical IBF contracts were structured according to the commercial situation of a pre-modern society.

The connection with the present is tenuous at best especially in the realms of finance.

Classical contracts were typically trading contracts and not financing ones. However, to continue with that sort of thinking would have rendered Islamic commercial thinking stagnant and difficult to apply. Nevertheless, universal principles pervade in the classical contracts that can be used today. The principles of Riba and Gharar are still as important today, if not

Both pillars concern exchange of goods. In the exchange, there is a transfer of ownership which can be affected by way of aqd (contract) or waad (promise). Only the latter can be unilateral (I promise you) or bilateral (I promise you and you promise me). Contracts are typically the latter, but there are instances of unilateral contracts such as gifts, loans and endowments. Promises are a controversial aspect of today’s Islamic finance industry due to the debates about whether it is binding or non-binding. Most scholars are of the view that each promise in its unilateral sense is binding; but the two together are not acceptable (i.e., combination is similar to a forward contract and hence not permitted).

• Counter values of the same currency must be of equal amount • No conditional option or deferment regarding the delivery • Should not be carried out on future or forward markets • Hedging against the future devaluation of currency is permissible These contracts are being applied in conventional banks. Dr Dar explored this in session three where he broke down the contract and it’s utilization in different Islamic banks. He explained the two-tier Mudaraba, a remarkable innovation for the Islamic banking industry. Depositors, as investors, invest with the Islamic bank who acts as agents. The Islamic bank then becomes the investor using, in part, income accrued from depositors, to provide funds to clients in a Shari’a compliant

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Bilateral Contracts

• • • • • • •

Muawadat (contracts of exchange) Damanat (contracts of security) Shirka (contracts of partnership) Wadia (contracts of safe custody) Manfa’a (contracts of usufruct transfer) Wakala, Ju’ala (contracts rewarding for a specific job) Sarf (currency transactions)

manner.

Partnership contracts foster equity relationships and not debt relationships. The philosophy and the content of the relationships between partners are far different as compared to relationships between borrower and creditor.

It was a scheme of commercial action advocated by early proponents of Islamic banking and finance, but has unfortunately been somewhat marginalized due to the risk disparity Nevertheless, deposit accounts, housing finance, and funds are still based on partnerships.

A more popular structure used by Islamic banks has been Murabaha. This has generated much criticism as the Murabaha resembles

a conventional interest-based loan. Dr. Dar stressed the differences between two while identifying the differences in practice between Malaysia and the GCC countries. He spoke briefly about Tawarruq before a greater exposition on Ijara, Salam and Istisna in the modern world. He made final remarks on letters of credit and guarantees, once again revealing the tension between conventional commercial practices and Islamic legal thinking. These tensions can, and are, being resolved allowed less encumbered trades to take place. Flexibility and adaptability are key for the progress of Islamic banking and finance, but it has to be anchored by the Islamic law.

The presence of one of the founding directors

Major contracts used by Islamic banks Contract

Specifications

Murabaha

“Fixed income” contract credit sale on installments + mark-up Minimal exposure to the asset IB must study the credit rating of Assets & Clients IB must perfect its liens on the sold asset

Ijara

“Fixed income” contract Lease installments Minimal exposure to the asset IB must study the credit rating of Assets & Clients IB must insure it has control over titles of the asset

Salam/Parallel Salam

“fixed income” contract Forward sales / purchases with profit mark-up Minimal exposure to the client IB must ensure that goods could be delivered according to specifications and timetable

Istisn’a / Parallel Istisn’a

Similar to project financing IB must ensure that goods could be delivered according to specifications and timetable IB must ensure that purchaser (parallel istisn’a) is able to pays installments and buy manufactured goods.

IB must perfect its lien on the asset

Musharaka

Profit & Loss sharing = equity Profit depends on the profitability of the project IB applies risk mitigation techniques (whenever permitted)

Mudaraba

Profit & Loss sharing = equity Profit depends on the profitability of the project IB applies risk mitigation techniques (whenever permitted)

62 | I sl a mi c Fi n a n ce R e v i e w

of Akhuwat, Mr Muhammad Saleem Ranjha, provided an interesting turn to the IFAP. Dr Dar gave participants an extensive overview into the commercial aspects of Islamic finance; Mr Ranjha opened the doors of understanding of how Islamic finance can benefit the impoverished. Akhuwat is an extraordinary Islamic microfinance institution that rejects the interest based model of conventional microfinance. Starting in 2001, Akhuwat has grown, building on a model that emphasises and optimizes community interaction. Mr Ranjha introduced to participants the structure, performance and success of the only Islamic microfinance institution in Pakistan. He emphasized on the need to help the poor through building new businesses or clearing their debts through interest free loans called the Liberation Loans. The success of the interest free loans scheme has led the Akhuwat management to start other projects in energy and education where they are currently in the process of building the first ever tuition free university. The university will be able to fulfil its requirement of electricity through its own power generation plant. It would also help the adjacent villages to get electricity as well.

Akhuwat is the next generation Mit Ghamr: an Islamic finance institution that began a revolution in the way finance was conceived and practiced.

On the second day, the IFAP continued exploring technical aspects of Islamic banking and finance. The first session on diminishing Musharaka for home finance built on the lectures delivered by Dr. Dar the previous day.

Delivered by an experienced banker and a PhD fellow at the International Islamic University Islamabad Mr Amer Khalil-ur-Rehman, who with his experience of the industry as well as academia, took participants through the technicalities of the product. He explained the diminishing Musharaka practices of different banks nationally and internationally.

The Mudaraba sector in Pakistan is wellestablished. Mr Imran Hussain Minhas, Joint Director at the Securities and Commission of Pakistan for Mudarabas/Islamic Financial Institutions, was the speaker for the session.

Mudaraba is perhaps the first acknowledged Islamic financial contract. The initial business relationship between the Prophet Muhammed and Khadija was structured as a Mudaraba.

Today, this model has been modified, and one of the leading countries to innovate has been Pakistan. A regulatory framework governing Mudarabas is well established with four key pieces of legislation being promulgated since 1980 dealing with Mudarabas. These are:

February 2014 Issue

Differences between Murabaha and Conventional Loan Murabaha

Conventional Loan

• •

• •

IB: actual ownership, constructive or physical Closing date could be extended, no Early payment discounts are not welcomed

Penalties added to the profit margin of the creditor

penalties added

• •

Lender: no actual ownership

•

Possibilities of early payment discounts

Underlying asset could not be sold back to the original seller (bai Inah) (Except in Malaysia)

• Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980; • Modaraba Companies and Modaraba Rules, 1981 • Prudential Regulations for Modarabas, 2004 • Shariah Compliance and Shariah Audit Mechanism 2012 Mr Minhas elucidated the regulatory requirements and procedures to the participants. He discussed registration, monitoring, the appointment of auditors, filing requirements, compliance and the protection of investors. Mr Minhas took time to go through the Shari’a compliance regime, describing the appointment of Shari’a scholars, their duties, screening criteria, the payment of dividends and the link with charities.

The final session of the day and of the IFAP was on Sukuk. Sukuk have been the most discussed product around the globe so the programme had a session on the structures of Sukuk being used around the world. Former head of Islamic banking at Saudi Hollandi bank Kamal Mehmood Mian was the key trainer.

Kamal Mian has been part of some initial deals of Sukuk in the Middle East. He expounded

the strength of Sukuk and its need in the modern world. The Shariah Standard issued by the AAOIFI defines the Sukuk as “certificates of equal value representing individual shares in ownership of tangible assets, usufruct and services or (in the ownership of ) the assets of particular projects or special investment activity.” From this definition one can see that Sukuk are a hybrid instrument that has both debt and equity profiles. Mr Mian went through the basic structure of Sukuk before embarking on a detailed exposition of the various iterations. The most popular structures used are the Ijara and Mudaraba Sukuk The IFAP concluded with closing remarks where participants received the HD Certificate in Islamic Finance. Chairman World Congress of Muslim Philanthropists Dr Tariq Cheema honoured the occasion and addressed the participants. Dr Cheema emphasized the importance of social responsibility and philanthropy in the modern world. Upon this bedrock, Islamic finance has grown. There have been criticism and obstacles and it is continuing to evolve but as this first IFAP in Pakistan has shown, there is much Islamic finance can offer both to the commercial and philanthropic sectors.

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ARABESQUE — A UNIQUE STORY OF VALUES-BASED ASSET MANAGEMENT I

t is interesting to note that while there are now quite a few global brands emerging from the Middle East, like Emirates airline and Al Jazeera TV, the Islamic banking and finance sector has so far failed to produce a globally recognized and respected brand. Though there are a number of strong Islamic banking brands, like Dubai Islamic Bank and Kuwait Finance House, the industry has yet to produce a global mega brand.

Given the estimated US$6tn in assets held by Islamic banks, sovereign funds and ultra high net worth individuals from Muslim-majority countries,3 and given a global population of 1.6 billion Muslims,4 there is a considerable imbalance between the current size of the Islamic asset management industry and the potential demand for its products.

The story is even grimmer when it comes to Islamic asset management. There is no specialized Islamic firm amongst the world’s 500 largest asset managers.¹ According to the Islamic Financial Services Board (IFSB), Islamic funds have only US$64bn under management.2 More worryingly, the IFSB report concludes that despite a steady growth over the last decade, Islamic funds have been notably slow to develop any real market depth or sophistication.

While working at Barclays Capital, a group of senior bankers under the leadership of Omar Selim conceived of a fund management company that would combine an Islamic investment methodology with the principles of sustainable and responsible investment and state of the art portfolio management.

Arabesque’s aim is to build investment products that generate the same or better risk/ return profiles than a comparable conventional funds, while at the same time being in

However, this may not be true for much longer.

¹ Towers Wattson, The World’s 500 Largest Asset Managers.

2 IFSB, Islamic Financial Services Stability Report 2013.

3 Sovereign Wealth Fund Insitute; The Banker, Top 500 Islamic Financial Institutions; CapGemini and RBC, World Wealth Report 2013.

4 PewResearchCenter, The Future of the Global Muslim Population.

64 | I sl a mi c Fi n a n ce R e v i e w

compliance with the value preference of its investors Since leaving Barclays, they have made it happen.

It is called Arabesque, and now has a global presence. Its headquarters are in London, and it has a research, advisory and distribution presence in Frankfurt, Germany. The new firm has applied for authorization from the Financial Conduct Authority in London, and it hopes to open its doors for business very soon.

At the heart of Arabesque’s vision is the conviction that sustainable and responsible investment is now an imperative. “The world has moved on,” said Omar Selim, Arabesque’s founder and CEO. “There is now an additional dimension to investing — a double bottom line. It is no longer good enough for investments to yield a return. Today, people should care precisely how that return is made.

February 2014 Issue

Omar Selim

Dominic Selwood

The future is very clear. Investments need to be sustainable and responsible. At the same time, the balance of risk and return profiles are more key than ever, with an immense focus on how robustly investments are protected against the downside. These two convictions encapsulate Arabesque’s core principles.”

Sustainable and responsible investing may require: exclusions based on a company’s business involvement compliance with internationally accepted values such as the UN Global Compact integration of environmental, social and governance (ESG) issues into investment management direct engagement with portfolio companies Sustainable and responsible investors share two critical priorities with Islamic investors. The first is a demand for superior risk and return profiles of their investments. The second is to comply with the investors’ convictions and values.

The benefits of sustainable and responsible investing have been recognized for a long time, but to bring home their importance, Arabesque has partnered with the University of Oxford to investigate the direct impact of environmental, social and governance (ESG) issues on a company’s financial performance.

The resulting Arabesque/Oxford case study research, combined with an analysis of more than 160 academic studies, has demonstrated that companies showing high ESG scores enjoy

Andreas Feiner superior financial performance. Andreas Feiner, Arabesque’s Head of Values Based Research and Advisory, explains, “Our research with Oxford shows, most importantly, that investments into companies with high ESG scores suffer fewer tail-risk events and a superior return over the medium to longer term.”

Arabesque’s focus on sustainable and responsible investing is sewn into the firm’s DNA, along with its commitment to Islamic investing in line with AAOIFI standards. ⁵ Islamic investing requires: exclusions based on a company’s business involvement (e.g., conventional finance, weapons, alcohol, tobacco, etc.) exclusion of companies that hoard cash or have excessive leverage on their balance sheet

purification of dividends

The founding partners of Arabesque believe firmly that there is a considerable overlap between the core concepts of sustainable and responsible investing on the one hand and Islamic investing on the other, and they point to copious academic studies in support⁶ Arabesque’s Head of Islamic Products, Dr Dominic Selwood, explains why. “Sustainable, responsible and Islamic investment values are all based on financial moderation and common sense — valid across regions, cultures and faiths. For example, we have found a 100% overlap between the ten principles of the UN Global Compact and the Qu’ran and the Hadith. And the same could be said of the core tenets of many other faith traditions.”

At the core of Arabesque’s product offering is the Arabesque Prime League, which comprises the eligible investment universe for all Arabesque’s funds. It is the result of a sophisticated screening process which filters the world’s 77,000 major stocks via six steps:

5 Accounting and Auditing Organization for Islamic Financial Institutions.

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Suitability Screen: selecting the most liquid and tradable stocks Forensic Screen: avoiding companies that show signs that might indicate fraudulent behaviour UN Global Compact: compliance with the 10 principles, which are based on universally accepted principles governing human rights, labour, the environment and anti-corruption ESG: integrating environmental, social and governance criteria into the investment process in line with the first principle of the Principles of Responsible Investing Portfolio Refinement: sustainable balance sheet and business involvement screening based on Islamic principles in line with AAOIFI standards Active Ownership: proxy voting and direct company engagement in line with the second principle of the Principles of Responsible Investing Arabesque is proud of its success in implementing this robust screening matrix.

“We have partnered with world class and experienced research companies,” continued Andreas Feiner. “They support Arabesque’s selection of a globally diversified equity portfolio in compliance with universally

accepted values. The resulting investment universe appeals to Muslim and non-Muslim investors alike.”

At inception, Arabesque will offer investors three distinct global equity funds: Arabesque Prime Global Equity Fund: a globally diversified portfolio of equities which tracks the performance of the Arabesque Prime League.⁷ The objective is to outperform the MSCI World by an average of 1% over three to five years.

Arabesque Fundamental Global Equity Fund: a selection of stocks from the Arabesque Prime League, chosen using a fundamental screening technology. The technology is currently applied live on the MIZAN fund, a US Collective Investment Trust with a 5-star rating from Morningstar. This strategy has been applied to US stocks for over a decade, on assets in excess of US$1bn. The objective of the fund is to outperform the MSCI World by an average of 3% over three to five years.

Arabesque Systematic Global Equity Fund: a selection of stocks form the Arabesque Prime League, chosen using Arabesque’s proprietary Adaptive Risk Technology (ART). The ART was developed by the founders of Arabesque at Barclays Capital, and was a core element of the intellectual property Arabesque’s senior management purchased from Barclays in 2013.

The ART works by dynamically adjusting the exposure into equities between 0% and 100% of the portfolio value. No leverage or short positions are allowed. The objective of the fund is to deliver an average return of 10% annually over three to five years with maximum drawdowns of less than 20%.

The core Arabesque team began work on the vision at Barclays, but since leaving they have quickly expanded to take on a range of international professionals, including industry leading investment managers and quantitative scientists. “We are delighted to benefit from so much inter-disciplinary talent,” Omar Selim confirmed. “Arabesque is about strength through building on a wide range of expertise and experience.”

The firm has engaged a formidable advisory board comprising leading academics in the fields of sustainable investing and financial modelling, as well as prominent industry names in the realms of Islamic and sustainable finance. Advisers include Colin Melvin, CEO of Hermes Equity Ownership Services, who was the first chairman of the UN Principles for Responsible Investment; Prof. Rob Bauer, the leading expert on sustainable investing, Maastrichy University; Michael Jantzi, CEO of Sustainalytics; and Mohamed Donia, CEO of Idealratings.

Their Islamic board is global and comprehensive, comprising Sheikh Nizam Yaquby (chairman), Dr Muhammad Elgari (member), Dr Aznan Hasan (member), and Professor Humayon Dar (secretary). “For us the question of Islamic investing is not just one of fulfilling technical requirements,” Dr Dominic Selwood explained. “We are delighted to be partnering with a board that embraces the wider call to the international Principles of Responsible Investment.”

At the beginning I alluded to the gap between the US$64bn under management in Islamic funds and the US$6tr in Muslim assets. The question I pose is: why is there this gap in the current demand and the potential size of the market? I believe that there is only one answer.

The Islamic asset management industry has failed to create a brand with which Muslim investors would like to associate themselves.

As I mentioned, that could now all be about to change. Omar Selim and his team believe that Arabesque will fill this gap when it opens its doors soon: for Muslims and non-Muslims alike.

⁶ Hermes EOS, Islam and Responsible Ownership; Harvard Islamic Finance Project, Building Bridges Across the Financial Communities; Michael S Benett & Zamir Iqbal, How Socially Responsible Investing Can Help Bridge the Gap Between Islamic and Conventional Financial Markets. ⁷ Based on the free-float market capitalization method.

66 | I sl a mi c Fi n a n ce R e v i e w

Global Leader in Takaful Expertise www.fwugroup.com

Why choose FWU Group for tailor-made “white label” Family Takaful Savings, Education, Marriage & Retirement plans?

Regular and lump sum contributions Open investment architecture Dynamic Protected Sharia compliant Equity Strategy Robust web-based sales and policy administration system designed for customer convenience Structured Retakaful solution with a major global reinsurance company Annual Retakaful surplus distributed to the individual participants

Bank distribution partners in the Middle East, Far East and the Emerging markets

Awards and Recognition

‘Best Takaful Provider’ Euromoney Islamic Finance Awards 2011

Offer local support through International office in Dubai and regional office in Kuala Lumpur FWU Group is A leader in international Bancatakaful, product innovation and quality customer service An Observer Member of the Islamic Financial Services Board (IFSB)

Dr. Manfred J. Dirrheimer, Chairman & CEO, FWU Group Office 1, Currency Tower, Level 16 Dubai international Financial Centre Street Dubai, UAE Email: M.Dirrheimer@fwugroup.com Tel: +9714 4175 500

‘Best Bancatakaful Operator’ Islamic Business & Finance Awards 2010

Sohail Jaffer, Partner, FWU Group Office 1, Currency Tower, Level 16 Dubai International Financial Centre Street Dubai, UAE Email: S.Jaffer@fwugroup.com Tel: +9714 4175 500

The Collaborative Economy

“We The People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

H

ow peculiar that this article should start with the beginning of the US Constitution; indeed, the perennial words of the preamble evoke the universal desideratum of unity between people in a simple and evocative manner. Emboldened, We The People, signals to all readers that the newly formed state is a united state, where people assist each other in the peace and sustenance of the community.

The full constitution, by its nature, pronounced the highest ideal of democracy: government of the people, by the people, for the people.

Of course, the candyfloss, saccharine, love thy neighbour, unity that we all desire, and that is evoked by the constitution is rarely, if ever, manifested in the world. Even the USA is fettered by its own internal conflicts, whether on the highest level of government, or amongst citizens living within the country.

So we need the rule of law to order individuals, restraining their dissolute tendencies. It is there to work for the community and against the corrupt.

Utopia is a distant hope particularly as humans have different needs and different ways of

68 | I sl a mi c Fi n a n ce R e v i e w

executing their needs. However, if there is one thing that unites all individuals is a desire to survive. Survival is a goal for all: it is primordial.

Every single person lives with a fear of their own mortality - some more than others – and they forage for a way to live.

So we work. This is the primary reason for our ponderous trudging into offices every day.

Once we have secured a sufficient level of income to survive, our next goal is to embellish our lives, to enjoy the finer aspects of life: the Iphones and the BMWs, trips to the Bahamas, and tasting the finer cuisines at exclusive restaurants. Perhaps we will have extra money to save for a rainy day, or to invest to generate more income to enjoy life’s offerings.

From survival to embellishment, the life of the worker can be quite insular. Often times the worker has little regard to the product or service that results from his efforts except for the money that it generates. Achievement is measured by purchase, and also, in the economic transaction the transferral of goods represents something more than just a transferral of money.

In fact, one can look at a price and view it as portions channelled to other individuals. One buys bread from the bakery, part of the price goes to each person working in shop, part of the price goes to the individual that sold the shop wheat, to the individual who works at a factory that sold the bakery the counter from which to serve, and so on and so forth. In the simple act of purchasing bread, money is being funnelled to the livelihoods of countless others.

And while we are not aware of this network, we are certainly contributors to a collaborative economy, each contributing to the other simply through the payment of the price of a good. But it is not enough to simply pay for goods that help people. Companies produce goods that we purchase, and they need investment to come to fruition. They need investment to bring in the labour and capital to produce the goods that will mutually benefit the customer and lives of the individuals working for the production of the good. It is in investment that this can be made possible, which has the added benefit of developing innovations and allowing man to progress.

November February 2013 2014 Issue

The power of an idea By no means is the world utopian, free from pain and destruction. It is in a state of perpetual conflict, if not with nature then with inhabitants hell-bent on exterminating the other. These are the extremes. In more calmer times, there are worries about health or boredom, and so we need means of mitigating these negative aspects of life. There are always gaps in the market that need filling, most of these gaps are not known. Perceptive individuals recognise these gaps and seek ways of filling them. For example, today the mobile phone is ubiquitous, but do we honestly need them to survive? The answer is no, yet look at how it has improved our lives in terms of communicating with loved ones spread out across the world. The first phone connected Alexander Graham Bell to his assistant in the next room. Now communication can occur instantly across distant spaces.

What Bell had was an idea and an inventive mind; it is what Bill Gates has, it is what Tim Berners-Lee has, it is what Jean Joseph Etienne Lenoir had, it is what Leonardo Da Vinci had, it is what Abbas ibn Firmas had.

Each one of these individuals contributed to the way we live and work in the world by their thinking. But it is not enough for a person to have an idea, and the ability to invent; he also needs the necessary investment to ensure their idea becomes a reality.

The power of this triumvirate - idea, ability and investment - can be seen behind the creation of any invention or innovation throughout history. A stark example is that of electricity to produce light. Thomas Edison’s long lasting light bulb running off alternating current was used to power the lights in homes in New York; his company was heavily invested into by JP Morgan and the affluent Vanderbilt family.

Without their investment, the proliferation of electric light would have probably remained an idea, to be exploited by someone else with money.

Today, electricity is seen as a necessity. If there is a blackout, there is usually an uproar and opprobrium against the electrical company

or government. 100 years ago it was a luxury.

This is the power of invention, to take what was absent and make it prevalent. All an idea needs is a little bit of investment, and its flowers will take care of itself.

Ideas

Manifesto for change

Can we smell diseases? There is a growing body of research that show diseases leave a “smellprint� that can be traced. If harnessed, there is potential to remove the more invasive methods of treatment for certain diseases such as colon cancer, or catch a disease early before spread resulting in terminus to the individual.

A number of organisations have been set up, often times in partnership with leading research universities. The eNose Company has developed the AeonoseTM, an electronic, prefabricated diagnostic that functions like a nose. It picks up chemical from the breath of a user and identifies any abnormal chemicals.

These abnormal chemicals cause changes in electric conductivity that can be measured.

Building up patterns can identify certain diseases.

The triumvirate changes the world; unfortunately it is an equation that the Islamic finance industry has failed to take heed of.

Instead there has been a focus on the needs of the retail or institutional customer, incentivising income generation not wealth creation. Wealth creation is facilitating the creation of assets from which its benefits can be appropriated.

For some reason, the asset of choice appears to be real estate. The industry has an inordinate focus on investing in real estate whether in UK, Paris, or Dubai, and profiting from the rent.

This is sensible, but embarrassing. The industry speaks of benefiting the community, helping the community, equity, poverty alleviation; yet it is not willing to take the risk required to truly benefit communities for the long term.

Without taking this risk, Islamic finance will remain in the domain of the affluent. There needs to be a paradigm shift, a change of thinking, a focus on building entrepreneurs and investing in ideas that have the potential to change the way humanity lives. It should not be about a certain group of people, it should be about all people.

Investing in ideas means developing products; developed products are then purchased, and there is a flow of income affecting the lives of millions. A true collaborative economy arises when the investor, the idea, the product, the labourer and the consumer are united.

Think of potential of some of these ideas.

Imagine investing in them. Envision the potential

Idea In our metabolic system, waste products are flushed out through breath, blood, urine and skin. Chemicals released can indicate the type of disease and utilising sensors and computer analytic properties, it is hoped that we will be able diagnose certain diseases early including forms of cancer.

Potential

Thomas Edison

JP Morgon

There will never be a cure for death. On the other hand, the way we die, and the when, can to some extent be controlled.

Cancer has been a particularly aggressive and pernicious disease; if not caught early it can lead to an insufferable life regardless as to leads to death or not. Detecting smells marks a way forward, and can affect the lives of billions.

The importance of clean water. As any person who is from or has visited a developing country, water sanitation is a huge problem.

According to the United Nations that one in six people have inadequate access to safe drinking w w w. i s l a m i c f i n a n c e r e v i e w. c o | 69

water. This results in an array of diseases, more or less absent from more developed countries. Technology that helps purify water will assist in freeing poor families the worry of drinking contaminated water Alfredo Zolezzi is the founder and the Chief Innovator Officer of the Chile based Advanced Innovation Centre. Zolezzi, his team and outside partners have been working on developing a water purification system that can be produced at low cost. The fruit of their efforts is the Water Plasma Purifier. The system converts contaminated water into matter similar to gas, known as plasma. In this state, it kills 100 percent of bacteria and microbes it carried.

According to Zolezzi, the system can 35 litres of water in 5 minutes using the same amount of energy as it takes to power a light bulb. He is looking to mass produce the purifier to be sold at an affordable cost.

Idea Removing contaminants from water supply is practiced by the utilisation of high-capital salianation plants. This is not feasible in poorer countries, shackled by lack of funds.

Reducing the costs of water purification will help poor communities to have access to purer water and avoid contracting waterbased diseases.

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Potential According to the World Health Organization, more than 11% of the world’s population do not have access to safe water. Globally, diarrhoea is the leading cause of illness and death, and 88% of these deaths are caused by a lack of access to safe, sanitary water, one of the primary needs of human beings.

The potential is huge.

A Return to the beginning These were only a couple of ideas, served to only whet the appetite. Perhaps these products will not be successful, but they show the power of innovative thinking.

Google Inc has been particularly ambitious in fostering, curating, developing and deploying products that have stretched the imagination.

In essence, they have hoarded a bunch of intelligent engineers, gave them a blank cheque and encouraged them to think outside the box. Now we have Google Glasses and driverless cars. We do not know how successful

they will be, but the blank canvass, the think and create ideology, the spot a gap and fill it approach brings a whole new meaning to the idea of progress. The Singularity University, an unaccredited university based in Silicon Valley, is highly ambitious, well funded institution committed, in its words, to “address humanity’s grand challenges”. It brings together scientists, engineers, funders, innovators, social workers, etc, together under the umbrella of Think Change, Bring Change. Its remit is broad from trying to find the cure to cancer, to exploring space through the creation of ground breaking technologies. Recently, it announced a $50 million venture capital fund to invest in building ideas into tangible products. The university is connecting money with ideas.

This is what Islamic finance needs to do, and needs to do soon. It has to go back to its roots of profit and loss sharing. This is not only monetary. It means really sharing in the ideas of the creator, investing into the ideas that can truly benefit humanity. People are far too concerned with how loss means loss of money, and profit is about gaining money. Rather it should be about profiting from what a product can do for people. This is what We The People is about. It is about help, not competition, universal progress and not individualism. We need to return to the beginning. It just makes sense to do so.

Bank Nizwa wins GIFA 2013 for ‘Upcoming Bank in Islamic Finance’

After two prestigious awards in Oman, Bank Nizwa has become the first bank from the Sultanate to be awarded ‘Upcoming Bank in Islamic Finance’ at the Global Islamic Finance Awards (GIFA) in Dubai in November 2013.

We dedicate this award to our nation and to our customers.

Branches: ■ Qurum ■ Nizwa ■ Sohar ■ Salalah ■ Ibra ■ Al Khoud ■ Al Ghubrah Call us 24x7 on +968 24 950 500 Visit us on www.banknizwa.om

• MSc Islamic Finance • MSc Islamic Finance and Management • PhD in Islamic Economics, Banking, Finance and Management • Durham Islamic Finance Summer School